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The Financial Services Authority (FSA) has today published a Consultation Paper (CP) and Discussion Paper (DP) on its proposals for Recovery and Resolution Plans (RRP), required of financial institutions.

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.

The CP covers the requirement for banks and large investment firms in the UK to prepare and maintain Recovery and Resolution Plans and the DP explores matters relevant to the resolution of financial services firms.

The 2008 banking crisis highlighted that firms failed to have effective recovery plans in place. 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. 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. Under the Financial Services Act 2010 all UK deposit-takers are required to have RRPs in place. Today’s documents put in place the process for implementing that requirement.

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 or, if necessary, wind-down 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.

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.”

The documents set out the following proposals for consultation:

Recovery Plans

Recovery Plans will seek to reduce the likelihood of failure by requiring firms to identify options in order 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 specifically they should have the following features:

• sufficient number of material and credible options to cope with a range of scenarios including both distinctive 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 not consider in less 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
• appropriate governance processes including triggers and procedures to ensure timely implementation of recovery options in a range of stress situations
• plans should be reviewed at least annually and approved by the Board

We expect that firms who are in the future supervised by the Prudential Regulation Authority will have their recovery plans supervised following the proactive intervention framework which the PRA will establish. 

Resolution Plans

These plans will show how the firm will wind-down if it fails for whatever reason.  This enables an assessment of the potential effect on financial stability to be made and then an assessment of whether this is acceptable. 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 firm. The information provided to the authorities will help to prepare a strategic plan with the following aims:

• to ensure that resolution can be carried out without public solvency support exposing taxpayers to the risk of loss;
• to seek to minimise the impact on financial stability;
• to seek to minimise the effect on UK depositors and consumers;
• to allow decisions and actions to be taken and executed in a short space of time (or the 'resolution weekend');
• to 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 (SIFIs)  with international regulators.

Resolution Plans must be reviewed by the firm at least annually and updated to reflect any material developments in a firm's business.

All UK incorporated deposit-takers, subsidiaries and significant investment firms with assets exceeding £15 billion will need to implement RRPs. Branches of overseas entities will not be subject to our rules, but arrangements for resolving branches will be pursued bilaterally with the home state regulator and through the relevant Crisis Management Groups or Cross Border Stability Groups.

Client Money and Assets

The CP also sets out proposed requirements relating to investment business client money and custody assets (CMA), known as the CASS Resolution Pack (CASS RP). The CASS RP aims to promote the speedier return of CMA to clients, once a firm has failed, by ensuring that vital CMA information would be readily accessible to the Insolvency Practitioner appointed to that failed firm. The CASS RP proposals apply to all firms subject to CASS 6 or 7 due to their holding of (investment business only) CMA.

Also published today is a Discussion Paper that explores different approaches to removing barriers to resolution and enhancing resolvability including the resolution of trading books, enhancing the resolution toolkit and bail-ins. Responses to the DP will assist the FSA in its policy making and international discussions.

Once the consultation is complete the FSA will issue a policy statement around the end of the year with an expectation that some firms will have RRPs in place by 30 June 2012 (policy work on the CASS RP proposals may follow different timings). The time frame reflects the exceptionally complex nature of some firm’s RRPs, the fundamental changes to firms’ structures, business operations or systems that may result from their implementation and the wider work being undertaken internationally on this issue.

^{* See the Communiqué of 7 November 2009}

Notes to editors

1. The Consultation Paper and Discussion Paper can be found on the FSA website.
   
   
2. This paper has been prepared by the FSA with assistance from the Bank of England and the Treasury.
   
   
3. The consultation will be open for a period of 3 months, closing on 9 November 2011.
   
   
4. The FSA will hold events for firms and advisers to talk through the proposals in early September. Further details can be found on the FSA website.
   
   
5. This Consultation Paper (CP) covers the requirement for certain financial services firms to prepare and maintain Recovery and Resolution Plans (RRPs). The Financial Services Act 2010 (FS Act 2010) obliges the FSA to make RRP rules for UK incorporated deposit-takers having regard to international standards relating to RRPs. It also requires the FSA to consult with the Bank of England and the Treasury in developing those rules. The G20 (through the Financial Stability Board) has made commitments to require 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.
   
   
6. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.