Webinar on CASS RP for Insurance Intermediaries

On 16 April 2013 I am a guest speaker in a webinar being given by the Forum for Regulatory Change.  The presentation will focus on the future requirements for insurance intermediaries to prepare and maintain CASS Resolution Packs.  It will summarise the law in this area as it applies to insurance intermediaries and will leverage off the practical experience we have derived from implementing CASS Resolution Packs for banks and investment firms.

The event is free and you can register here.

Banking Reform Bill: HM Treasury publishes Amended Statutory Instrument

On 18 March 2013, HM Treasury published an amended version of draft Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order (the “Ring-Fenced Bodies Order”).  The Ring-Fenced Bodies Order is one of the pieces of secondary legislation to be made under the Banking Reform Bill.

The main change from the original version of the Ring-Fenced Bodies Order, published on 8 March 2013, seems to relate to high net worth individuals (“HNWI”) and small and medium sized enterprises (“SME”).  As detailed in our previous blog post, deposits are exempt from the requirement to be held within a ring-fenced body if they are held on behalf of:

  • HNWI (i.e. individuals who have, on average over the previous year, held free and investible assets worth GBP 250,000 or more); and
  • SME which are also financial institutions.

Under the original order, HNWIs and SMEs could effectively self-certify their status as such.  Under the amended order it seems that the institution in question is now responsible for determining whether HNWI or SME status is indeed appropriate.

RRD to be finalised in Q2 2013

On 15 March 2013, the EU Council published the conclusions of its meeting held on 14 to 15 March.  Among the many issues discussed, the following are particularly relevant to the banking sector:

  • finalisation of the legislative process on the Single Supervisory Mechanism within the coming weeks is a priority;
  • agreement of the Bank Recovery and Resolution Directive (RRD) and Deposit Guarantee Scheme Directive must be achieved before June 2013; and
  • a legislative proposal on the Single Resolution Mechanism is to be submitted by the EU Commission by summer 2013 with the intention of adopting it during the current parliamentary cycle.

PCBS Itching to Ban Proprietary Trading

On 15 March 2013, the Parliamentary Commission on Banking Standards (PCBS) published its Third Report on proprietary trading within banks.

The PCBS considers that there is no commonly-accepted definition of proprietary trading and recognises that most activity undertaken by banks results in some form of proprietary position.   However, it is primarily concerned with trading in which a bank uses its own funds to speculate on markets, without any connection to customer activity.  It accepts that proprietary trading results in risks which are not necessarily any different from those associated with other banking activities, many of which actually made a greater contribution to the financial crisis.  Nonetheless, it considers that the argument that proprietary trading can have harmful cultural effects within a bank has been “convincingly made”, creating a conflict of interest between a bank’s attempts to serve its customers and the trading of its own positions and, as such, being “incompatible with maintaining the required integrity of customer-facing banking”.

Despite its in-principle opposition to proprietary trading, even outside of a ring-fenced bank, the PCBS recognises the practical difficulty in establishing a definition of “proprietary trading” which is capable of being effectively enforced, given its similarity to other activities such as market-making.  Even alternative metric-based approaches, such as those being considered in the US, which track patterns of trading activity remain unproven, relatively complex and resource-intensive.  Consequently, the PCBS believes that it would not be appropriate to attempt immediate prohibition of proprietary trading through the Banking Reform Bill (BRB).  However, it does recommend that the current legislation require the regulators to carry out, within three years of the BRB being enacted, a report to include, inter alia, a full assessment of the case for and against a ban on proprietary trading.  This report would be presented to the Treasury and to Parliament and serve as the basis of a full and independent review of the case for action in relation to proprietary trading by banks.  In the meantime, the PCBS recommends that the Prudential Regulation Authority (PRA) monitor the main UK-headquartered banks’ assertion that they no longer engage in proprietary trading, and should use its existing tools such as capital add-ons or variations of permission to “bear down on such activity and incentivise the firm to exercise tighter control”.

G-SII List Delayed

Risk Magazine is reporting that the initial list of global systemically important insurers (G-SIIs), originally due to be published in April 2013 by the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS), has now been delayed until the end of Q2 2013.

Elsewhere, the FT is reporting that the IAIS is set to publish proposals on Wednesday which will mean the G-SIIs will not be subject to capital surcharges on their entire balance sheets, but only on that part of the balance sheet which constitutes non-traditional non-insurance business.  Moreover, insurers that take steps to segregate these businesses in separately capitalised entities will be subject to lower charges than those that allow co-mingling with other business lines to take place.

ECON Draft Report on Structural Reform of EU banking sector

On 13 March 2013, the EU Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report on reforming the structure of the EU’s banking sector.

The report welcomed the Liikanen Group’s analysis and recommendations on banking reform, concluding that, while current proposals for reform of the EU banking sector are important, a more fundamental reform of the banking structure is essential.  Accordingly, it urges the EU Commission to draft a proposal for full and mandatory separation of banks’ retail and investment activities via ring-fencing around those activities that are vital for the real economy.  According to ECON, mandatory separation should result in:

  • separate legal entities;
  • separate sources of funding for the bank’s retail and investment entities;
  • the application of adequate, thorough and separate capital, leverage and liquidity rules to each entity (with higher capital requirements for the investment entity); and
  • net and gross large exposure limits for intra-group transactions between ring-fenced and non-ring-fenced activities.


PCBC Publishes Second Report on UK Banking Reform

On 11 March 2013, the Parliamentary Commission on Banking Standards (PCBS) published its second report on banking reform in the UK.

The second report addresses the UK government’s response to the first report of the PCBS and specifically the suggestions made therein in relation to banking reform.  It makes a number of recommendations and observations, including:

  • Independent Review: the PCBS encourages the government to implement a fully independent review of the workings of the ring-fencing mechanism, and not just a regulator review as currently proposed.  This, the PCBS claims is “wholly inadequate” and amounts to no more than the “regulator marking its own examination paper”;
  • Full industry–wide structural separation: despite the government’s rejection, the PCBS continues to believe that the Banking Reform Bill should include legislation which would enable full structural separation of the banking industry if the independent review of the workings of the ring-fencing mechanism proposed above concluded that this were necessary;
  • Ownership structures: the PCBS is ‘disappointed’ that the government has chosen not to restrict the ability of an investment bank to own a ring-fenced bank; and
  • Leverage Ratio – the PCBS regards the case for maintain the acceptable leverage ratio of a bank at 3% (i.e. 33 times leveraged) as “extremely weak” and continues to press for a 4% (i.e. 25 times leveraged) limit.

The PCBS intends to publish its final report by mid-May 2013.

RRD to have First Reading in EU Parliament in September 2013

The EU Parliament has updated its procedure file on the RRD.  It now appears that the first reading of the RRD proposals will take place at the plenary session due to be held between 9 to 12 September 2013. Previously, it had been indicated that the Parliament would consider the RRD at is plenary session scheduled for 10 to 13 June 2013.

EBA Publishes Consultation Paper on draft RTS on recovery plans


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.

Strategic analysis

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[1];
    • 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.

Preparatory measures

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.

[1] 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.

EU Commission Publishes Summary of Responses to Non-Bank RRP Consultation


On 8 March 2013, the EU Commission published a summary of the responses (67 in total) it received to its October 2012 consultation on a possible recovery and resolution framework for financial institutions other than banks.  There is also a set of links to individual responses.

The summary addresses views expressed on the three categories of financial Institutions considered in the consultation, being:

  • financial market infrastructures (“FMI”) i.e. central counterparties (“CCP”) and central securities depositories (“CSD”);
  • insurance companies; and
  • other non-bank entities and institutions e.g. payment systems.

Financial Market Infrastructures

There was general agreement on the need for recovery and resolution plans (“RRP”) for FMIs, due to their systemic importance.  Although resolution measures for all FMIs should focus on ensuring the continuity of essential services, the RRP regimes for CCPs and CSDs should be tailored, reflecting the general view that CCPs are more systemically important than CSDs.  Both the RRP regimes for CCPs and CSDs should be different from the current proposals regarding RRP for banks, although powers to transfer operations of a failing FMI to a purchaser or bridge entity would still be required.  There was little common ground on the application of loss allocation to FMI beyond the need for predictability, clarity, preciseness, transparency and parity.

Insurance and Reinsurance Firms

There was a wide-spread recognition that insurance companies are less systemically important that banks and that Solvency II will enhance supervisors’ powers of intervention.  Nonetheless, except amongst insurers, there was general support for further investigation into the scope for resolution tools which could protect policyholders as well as financial stability in the event of an insurer’s failure. However, even outside of the insurance industry, there was no conclusive support as to the need for a detailed RRP framework.  The insurance industry objected to insurance-specific RRP proposals, arguing at a high-level that there is no evidence that RRP is needed and specifically that:

  • as yet, no sources of systemic risk in insurance have been identified;
  • consistency with international developments must be ensured before the EU legislates;
  • the current framework is sufficient, particularly in light of Solvency II; and
  • bank RRP is not suited to the insurance industry.

Other non-bank financial institutions

The majority of respondents expressed the view that payment systems currently do not require further consideration from an RRP perspective due to the fact that they are subject to central bank oversight.