On 11 March 2013, the European Banking Authority (EBA) published a consultation paper concerning “Draft Regulatory Technical Standards (RTS) on the content of recovery plans under the draft directive establishing a framework for the recovery and resolution of credit institutions and investment firms” (RRD).
The draft RTS have been developed pursuant to Articles 5(7) and 7(4) of the proposed RRD and relate to the information to be contained in recovery plans that are not subject to simplified obligations under Article 4 of the RRD. The consultation itself runs until 11 June 2013. Thereafter, the EBA will submit the final draft RTS to the Commission within twelve months from the date of entry into force of the RRD (expected to be early in 2015), although the EBA acknowledges that the RTS may have to be amended, depending on the final form of the RRD. The regulation will enter into force on the 20th day following that of its publication in the Official Journal of the European Union.
A summary of the requirements is provided below. However, as currently drafted, the requirements of the draft RTS should not be a cause of concern, particularly not for FSA regulated firms already used to complying with FS12/1.
Draft RTS on Recovery Plans
Recovery plans are expected to contain a discussion of at least the following five items (but not necessarily in the following order):
- a summary of the recovery plan;
- a discussion of governance issues;
- a strategic analysis;
- a communication and disclosure plan; and
- an analysis of preparatory measures.
As the name suggests, this section takes the form of a summary of the key elements of the recovery plan, taken from the other sections.
The governance section of a recovery plan should provide a detailed description of:
- how and by whom the recovery plan was developed, the way in which it is integrated into the risk management framework of the firm and processes in place to ensure that it is kept up-to-date;
- the policies and procedures governing plan approval;
- the conditions and procedures necessary to ensure timely implementation of recovery options, including:
- escalation and decision-making processes; and
- indicators which may require plan activation; and
- management information systems.
The strategic analysis section of a recovery plan should provide:
- a description of the institution/group (as applicable), including:
- a mapping of core business lines and critical functions to legal entities and material branches;
- a detailed description of the group’s legal and financial structures, including:
- intra-group legal, operational and financial interconnectedness; and
- external interconnectedness with respect to material branches/legal entities;
- recovery options dealing with a number of stress scenarios and providing the following information with respect to each recovery option:
- a description of the option;
- an impact and feasibility assessment;
- an operational contingency plan, dealing at the very least with the maintenance of:
- operational processes (both for any separated and remaining entities); and
- access to financial market infrastructure; and
- an assessment of the effectiveness of recovery options and adequacy of indicators in a range of scenarios of financial distress so as to facilitate an overall assessment of recovery capacity.
Communication and disclosure plan
A recovery plan should include a detailed communication and disclosure plan which:
- addresses both internal and external communication;
- describes, for each recovery option, how the communication and disclosure plan would be implemented; and
- provides an assessment of the potential impact on the business and on general financial stability.
A recovery plan must include an analysis of any preparatory measures:
- to facilitate the sale of assets/business lines in a timeframe conducive to the restoration of financial soundness; and
- that the institution/group has taken or plans to take in order to facilitate implementation of the recovery plan or improve its effectiveness.
 A “material branch or legal entity‟ is one that:
- substantially contributes to profits/funding or holds an important share of assets, liabilities or capital;
- performs key commercial activities;
- performs key operational, risk or administrative functions centrally;
- bears substantial risks;
- could not be disposed of or liquidated without being likely to trigger a major risk;
- has importance for the financial stability of at least one of the Member States in which it is incorporated or operates.