The Bank of England’s power to direct institutions to address impediments to resolvability

1: Background

1.1 This statement of policy is issued by the Bank of England (Bank), as the UK resolution authority, under section 3B(9) of the Banking Act 2009 as amended (Banking Act).^{footnote [1]} The statement of policy sets out how the Bank expects to use its power to direct a ‘relevant person’ to address impediments to resolvability under section 3A of the Banking Act.

1.2 A ‘relevant person’ means:

(i) an institution^{footnote [2]} authorised for the purpose of the Financial Services and Markets Act 2000 (FSMA) by the Prudential Regulation Authority (PRA) or Financial Conduct Authority (FCA);^{footnote [3]}

(ii) a parent of such an institution which (i) is a financial holding company or a mixed financial holding company; and (ii) is established in, or formed under the law of any part of, the United Kingdom; or (iii) a subsidiary of such an institution or of such a parent which (i) is a financial institution^{footnote [4]} authorised by the PRA or FCA; and (ii) is established in, or formed under the law of any part of, the United Kingdom.

2: Statutory framework

Process leading up to the use of the Bank’s power

2.1 The process for use of the Bank’s power is set out in sections 3A and 3B of the Banking Act and, where applicable, articles 64–71 of The Bank Recovery and Resolution (No. 2) Order 2014 (No. 2 Order). The process to be followed depends upon whether the impediment to resolvability is identified as part of the resolvability assessment or is made independently of that assessment.

Use of the Bank’s power following a resolvability assessment

2.2 The Bank must prepare resolution plans for all institutions within scope of the special resolution regime. The purpose of resolution planning is to develop a set of actions that would be taken by the Bank and relevant stakeholders (including other UK authorities and overseas authorities) in the event that an institution fails. Resolution planning includes: (i) gathering information to facilitate resolution; (ii) conducting resolvability assessments; (iii) developing resolution strategies; and (iv) enhancing resolvability.

2.3 As part of resolution planning, the Bank, in consultation with the competent authority (that is, the PRA or the FCA), must assess the extent to which it would be feasible and credible^{footnote [5]} to place the institution into resolution and implement the preferred resolution strategy, while avoiding to the maximum extent possible any significant adverse effect on the financial system of the United Kingdom or the continuity of the institution’s critical functions. The Bank must not assume that the institution will be in receipt of any: extraordinary public financial support; emergency liquidity assistance; or any other liquidity assistance provided by the Bank under non-standard collateralisation, tenor and interest rate terms. This resolvability assessment shall be based on the following consecutive stages: (i) assessment of the feasibility and credibility of the liquidation of the institution under normal insolvency proceedings; (ii) selection of a preferred resolution strategy; (iii) assessment of the feasibility of the selected resolution strategy; and (iv) assessment of the credibility of the selected resolution strategy. The resolvability assessment will be conducted annually, unless the Bank determines otherwise in accordance with articles 53 and 54 of the No. 2 Order,^{footnote [6]} at the same time as, and for the purposes of, drawing up or updating the resolution plan.

2.4 Following a resolvability assessment, the Bank will inform the institution of any identified substantive impediments to resolvability.^{footnote [7]} The institution will then have four months to make its own proposal to remove the identified impediments.^{footnote [8]} If the Bank concludes that the institution’s proposal is insufficient or no proposal is received, the Bank must use its power to require the institution to take measures to address impediments to the effective exercise of the stabilisation powers or the winding up of that institution.^{footnote [9]} The institution must propose a plan to achieve the measures required by the Bank, within one month beginning on the date of the direction.

2.5 The process for exercising the power to address impediments to resolvability following a resolvability assessment is set out in Figure 1.

2.6 The Bank must consult the PRA and the FCA and, where appropriate, the Financial Policy Committee before determining remedial measures to address impediments to resolvability. For the purposes of assessing the institution’s proposals and determining remedial measures, the Bank must take account of: (i) the threat to financial stability posed by the impediments; and (ii) the effect of the remedial measures on: the business and financial stability of the institution and its ability to contribute to the economy of the United Kingdom; the market in the United Kingdom for financial services; and the financial stability of the United Kingdom.

2.7 The Financial Stability Board’s international standard for effective resolution regimes^{footnote [10]} (the ‘Key Attributes’) agreed by the G20 leaders in 2011, states that home and key host authorities of all global systemically important financial institutions (G-SIFIs) should maintain Crisis Management Groups (CMGs) with the objective of enhancing preparedness for, and facilitating the management and resolution of, a cross-border financial crisis affecting the institution. CMGs will keep the resolvability of G-SIFIs under active review.

Figure 1: Process for exercising the power of direction following a resolvability assessment

Footnotes

• Note: An asterisk in a box indicates where a right of appeal is available.

Use of the Bank’s power in other circumstances

2.8 There may be circumstances which arise independently of the resolvability assessment process where the Bank considers it necessary to direct the institution to take certain measures in order to address impediments to the effective exercise of the stabilisation powers, or the winding up of that institution. For example, this could occur during late-stage contingency planning where the Bank needs to act to address an impediment prior to placing the institution into resolution.

Process for giving a direction

2.9 Bank directions must be in writing and may be given with general effect or with respect to a particular institution or a class of institutions.

Section 3A of the Banking Act provides that the directions may include, but are not limited to:

(i) a requirement to amend a group financial support agreement or, where there is no such agreement, to review the need to enter into one;

(ii) a requirement to enter into an agreement for the provision of services relating to the provision of critical functions;

(iii) a restriction on maximum individual and aggregate exposures;

(iv) a requirement to produce information which is relevant to the exercise of the stabilisation powers and to provide that information to the Bank;

(v) a requirement to dispose of specified assets;

(vi) a requirement to cease carrying out specified activities, or observe restrictions in relation to the carrying out of specified activities;

(vii) a requirement to cease the development of new or existing business operations, or observe restrictions in relation to the development of such operations;

(viii) a requirement to change its legal or operational structure to ensure that the performance of critical functions can be legally or operationally separated from the performance of other functions;

(ix) a requirement to establish a financial holding company which is not a subsidiary of an institution, another financial holding company or a mixed financial holding company;

(x) a requirement to maintain a minimum requirement for own funds and eligible liabilities;

(xi) for the purposes of (x), a requirement to maintain or issue particular kinds of eligible liabilities, or take other specified steps; and

(xii) a requirement to endeavour to renegotiate any eligible liability or relevant capital instrument to ensure that any decision by the Bank to write down or convert the liability or instrument would have effect under the law which governs that liability or instrument.

2.10 A direction by the Bank must be accompanied by a notice which: (i) states when the direction takes effect; (ii) gives the Bank’s reasons for giving the direction; and (iii) specifies a reasonable period within which the institution may make representations to the Bank about the direction.

2.11 The Bank must demonstrate how the remedial measures will adequately address the impediments in a manner proportionate to the burden or restriction imposed by the direction. As is the case with any public body in the exercise of its functions, the Bank will have regard to restrictions and conventions of public law, in particular the requirement for the authorities to act reasonably and to have respect for the rule of law and the principle of legal certainty. The Bank must also act in accordance with common law principles of procedural fairness when exercising its power of direction.

2.12 If a person fails to comply with a direction given under section 3A(2) of the Banking Act, remediation will be sought through the general enforcement powers contained in sections 83ZQ–83ZY of the Banking Act, which include one or more of the following:

(i) publication of a statement to that effect;

(ii) imposition of a penalty in respect of the failure of such amount that the Bank considers appropriate;

(iii) direction to refrain from any conduct, with a view to ensuring that the failure ceases or is not repeated or the consequences of the failure are mitigated; and

(iv) prohibition of specific persons from holding an office or position involving responsibility for taking decisions about the management of a named bank, a bank of a specified description or any bank.

3: The Bank’s approach to using the power of direction

3.1 The Bank will exercise the power of direction when required to address impediments to the effective exercise of the stabilisation powers or the winding up of that institution. When determining what constitutes ‘effective’ exercise of the stabilisation powers for these purposes, the Bank will have regard to the stabilisation powers it would expect to use in the preferred resolution strategy and the extent to which the impediment identified would prevent or reduce its ability to achieve the special resolution objectives. In the context of the bail-in tool, this extends to assessing whether there are impediments to restructuring the activities of an institution as part of the resolution, which could adversely affect the effectiveness of the tool in stabilising the institution and advancing the special resolution objectives.

3.2 The Bank will endeavour to respond within a reasonable period to an institution’s proposals for remedial measures or to an institution’s representations in relation to the direction given by the Bank. The Bank will prioritise the different impediments to resolvability and require the firm to follow a staged approach, where the most material impediments are addressed first.

3.3 The Bank’s direction may be given to a parent company in relation to impediments at a subsidiary level. Directions will include a timeframe by which the identified impediments to resolvability must be addressed. The period of time allowed may vary, taking into account the expected length of time to complete resolution planning, including the time required for cross-border groups. The Bank will oversee the institution’s progress and may choose to make its directions public, if appropriate and depending on the circumstances at the time.

3.4 Section 3A(3) of the Banking Act identifies a non-exhaustive set of examples of directions that the resolution authority may seek to make, as listed in paragraph 2.9. In addition, the list below provides a number of illustrative examples of possible scenarios in which the Bank may consider exercising its power of direction:

Loss-absorbing capacity

(i) Where action is required to ensure issuance of liabilities at the parent company level that would allow for loss absorption and recapitalisation of group entities.

Funding arrangements

(ii) Where the funding of subsidiaries by the parent company is not adequately subordinated or is subject to set-off or where there are no arrangements in place that would allow for losses to be transferred to the legal entity to which resolution tools would be applied.

(iii) Where more information is required to assess the institution’s potential liquidity needs implied by the resolution strategy, including a breakdown by currencies, legal entities, business lines, intraday needs and location of collateral across the group.

Continuity of contracts in resolution

(iv) Where action is required to ensure continuity of contracts in resolution, including continuity of operational services (whether provided within the group or by third parties), of trading agreements and of access to payment services and financial market infrastructures.

Information systems and data requirements

(v) Where action is required to ensure that there are systems in place that produce a rapid and effective valuation for the purposes of resolution, and that the institution’s valuation systems, process, controls and resources are aligned to support the institution’s resolution strategy.

(vi) Where an institution’s information systems and data availability do not ensure that the institution is able to produce required resolution-related data quickly and accurately, and/or that the Bank has access to information necessary to implement the resolution strategy.

Post bail-in restructuring

(vii) Where, to address the causes of failure and restore the long-term viability of an institution, action is required to ensure that a business line and/or legal entity could maintain continuity of service, be unwound or be transferred to a third party following a bail-in.

4: Decision-making

4.1 All decisions made by the Bank as resolution authority, including decisions in relation to the Bank’s resolution plans, resolvability assessments and the exercise of the power to direct institutions to address impediments to resolvability, will therefore be taken in the Bank’s resolution decision-making structures. Decisions on the use of the Bank’s resolution powers will be taken by the Governor, the Deputy Governor, Financial Stability or the Executive Director, Resolution (or their delegates), as appropriate, where applicable as advised by the Bank’s advisory committees which include staff from the Bank and PRA.

4.2 Before deciding to exercise its power of direction over an institution, the Bank, as resolution authority, will consult with the PRA and FCA. The PRA has its own formal decision-making structure for responding to Bank consultations, which mirrors the Bank process in allocating consultation decisions, taking into account the category of institution and impact of the decision on the PRA’s objectives.

4.3 Once the Bank has considered PRA and FCA views and reached a final decision, the Bank will co-ordinate with the PRA or FCA on issues pertaining to resolvability. For example, depending on the nature of the barrier identified in the resolvability assessment, the Bank could choose to exercise its power of direction, or alternatively, the Bank could propose that the PRA take action to require an institution to address an impediment to resolvability. Where there are common impediments affecting a range of institutions, the PRA could require the impediments to be addressed through rules of general application made pursuant to its statutory rule-making powers, or the Bank could give a direction with general effect or with respect to a particular class of institutions.

4.4 The decision-making framework for the exercise of the Bank’s power of direction will be guided by two principles: (i) complying with legal requirements, including those for operational independence of the resolution authority and structural separation of staff and reporting lines; and (ii) maintaining close co-operation between the supervisory and resolution functions in relation to resolution activities, with institutions receiving co-ordinated Bank and PRA or FCA communications on resolution matters. More broadly, institutions’ primary point of contact for going-concern prudential matters remains the PRA or the FCA.

5: Right of appeal

5.1 An institution has a right of appeal in relation to: (i) the Bank’s determination that there are substantive impediments to the resolvability of an institution; (ii) the Bank’s conclusion that the measures set out in the institution’s proposals would not adequately address the impediments; or (iii) the use of the Bank’s power of direction. Section 3B(7) of the Banking Act requires the Bank to inform the institution of the right to refer the matter to the Upper Tribunal and to indicate the procedure for such a reference.

5.2 Unless otherwise decided by the Bank (in accordance with section 3B(2) of the Banking Act), a Bank direction will not take effect until the period during which the direction may be referred to the Upper Tribunal has expired, or the reference and any appeal against the Tribunal’s determination has been finally disposed of.