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HM Treasury Consults on Non-Bank Resolution


On 26 September 2013, HM Treasury published a consultation paper regarding secondary legislation for non-bank resolution regimes.  The consultation will remain open until 21 November 2013.

As currently drafted, the Special Resolution Regime (SRR) established by the Banking Act 2009 applies to most deposit-taking institutions such as banks and building societies. The Financial Services Act 2012 widened the SRR to include undertakings in the same group as a failing entity, investment firms, and central counterparties (CCPs).  However, these provisions have not yet been brought into force.  The consultation seeks comment on a number of proposed statutory instruments required to underpin the widened SRR as detailed below:

Broadly, the issues discussed include:

Exclusion of certain investment firms from the scope of the SRR

The government is proposing to narrow the scope of the SRR so that it applies only to those investment firms that are required to hold initial capital of €730,000 (“€730k investment firms”) as specified in the Capital Adequacy Directive.  The government believes that there are approximately 2,000 investment firms in the UK, about 250 of which are €730k investment firms.  Non-€730k investment firms which fail will continue to be dealt with under normal insolvency procedure, or enter into the special administration regime (SAR).

Extension of stabilisation powers to “banking group companies”

At present, the SRR only permits the Bank to exercise stabilisation powers over a failing institution.  However, these powers are to be extended to cover banking group companies (“BGCs”), being:

  • subsidiaries of the failing institution;
  • parents which are “financial holding companies”; and
  • undertakings which are in the resolution group (i.e. subsidiaries of the “resolution group holding company”).

By virtue of the application of the SSR to investment firms and CCPs, the Bank’s SRR powers will also extend to undertakings within the same group as a failing investment firm or CCP (though the legislation refers to all such group undertakings as “banking group companies” irrespective of whether they are grouped with a bank, a building society, an investment firm or a CCP).

Introduction of further partial property transfer (“PPT”) safeguards

PPTs transfer some, but not all, of the property, rights or liabilities of a failing institution to a private sector purchaser or bridge bank.  A number of safeguards currently exist in relation to PPTs.  These safeguards are designed to protect contractual and market arrangements (and so provide clarity to, and bolster the confidence of, the market) within the context of a flexible regime which is able to resolve failing institutions effectively.  Specifically the safeguards include protection for set-off arrangements, netting arrangements and title transfer financial collateral arrangements; secured liabilities; capital market arrangements; and financial markets.[1]  The government proposes to extend these safeguards to investment firms and banking group companies.  It also proposes to make a separate statutory order to enact PPT protections with respect to recognised CCPs.  These would protect collateral and netting arrangements by only making a PPT possible with respect to a complete segregated business line of a CCP (i.e. a product set cleared by a CCP that is covered by a segregated set of default protections).

Introduction of further ‘no creditor worse off’ safeguards

Section 60 of the Banking Act 2009 permits the Treasury to make regulations about third party compensation arrangements in the case of PPTs, often called ‘no creditor worse off’ (“NCWO”) provisions.  As an example, an independent valuer is required to be appointed to determine whether pre-transfer creditors should be paid compensation and, if so, what amount, and the principles they must apply when making the valuation[2].  The government proposes to extend the NCWO provisions to PPTs made in respect investment firms and banking group companies.

Extension of the Bank Administration Procedure (BAP) rules

The government is proposing to amend insolvency rules to extend the bank administration procedure to (the residual part of) investment firms and banking group companies.  However, the BAP has not been extended to CCPs, as the resolution authority has powers of direction over the administrator of an insolvent CCP.


[1] The Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009 (SI 2009/332)

[2] The Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009 (SI 2009/319)

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