The Tyrie Report: Now it’s Personal

On 21 June 2013 the Parliamentary Commission on Banking Standards (PCBS) published its Final Report “Changing Banking for Good”, widely referred to as the “Tyrie Report” after its chairman Andrew Tyrie MP.  The PBBS was established in July 2012, with the broad brief to conduct an enquiry into the standards and culture of UK banking and to make recommendations.  Whilst highly critical of just about everyone – the government, regulators, banks, and individuals – its final 571 page report contains surprisingly little in the way of strategic regulatory proposals.

Instead, its recommendations are strongly focused upon the senior individual, effectively imposing financial penalties and/or criminal culpability for (potentially) less pay. The substantive recommendations may be broadly grouped under two headings: people and pay.


  • The FSA’s “Approved Persons” regime to be replaced by “Senior Persons”.  The new regime would only apply to senior management; however they would have to accept responsibility for specific areas; and
  • Junior employees would be subject to an enhanced licensing regime.


  • A new remuneration code more closely aligning risk and reward, with emphasis upon more extensive deferment of pay.  A recommendation that bonuses may be deferred for up to 10 years;
  • Regulatory powers to cancel deferred pay/unvested pensions and/or dismiss senior management in the event of their bank requiring taxpayer support; and
  • A new criminal offence of “reckless misconduct in the management of a bank”.

The only macro-prudential elements of the report are the suggestion that the UK consumer is ill-served by lack of competition in retail banking, that this may be ameliorated by the break-up of RBS, and a characterisation of the government’s management of Lloyds and RBS as “interference”.

During Prime Minister’s Questions on the 19 June 2013, David Cameron affirmed his intention to append at least the bonus clawback and new criminal offence proposals to the Banking Reform Bill, which is currently making its way through Parliament.

EU Council Agrees Approach to RRD

On 27 June 2013, the EU Council published a press release confirming an agreed position with respect to the Recovery and Resolution Directive (RRD) and calling on the EU Presidency to start trilogue negotiations with the EU Parliament with a view to adoption of the RRD at first reading before the end of 2013.

The press release focuses on three areas:

  • Bail-in;
  • Resolution funds; and
  • Minimum loss absorbing capacity.

It does not contain much in the way of detail beyond that widely reported over the last week.  However, it is perhaps noteworthy that only inter-bank liabilities with an original maturity of less than seven days are to be excluded from the scope of the bail-in tool.

EU Council Reaches Agreement on Bail-In Rules

The FT is reporting that EU Council finalised bail-in rules early this morning, agreeing that:

  • as expected, insured deposits under EUR 100,000 will be exempt, and uninsured deposits of individuals and SMEs will be given preferential status;
  • a minimum of 8% of total liabilities must be bailed-in before resolution funds can be used, whilst above this level, the use of resolution funds will be capped at 5% of total liabilities and will require EU approval; and
  • all unsecured bondholders must be fully bailed-in before a bank is eligible to receive capital directly from the European Stability Mechanism.

EU Parliament: We Don’t Actually Expect Liikanen to Work…

…we just want smaller banks.

On 25 June 2013, the EU Parliament’s Economic and Monetary Affairs Committee (ECON) published a report containing a motion for a resolution on reforming the structure of the EU banking sector that it adopted on 18 June 2013.  The report is notable less for the actual wording of the resolution and more for some of the statements made in the recitals which seem to cast light on the underlying motivations driving the structural separation of banks.

Separation doesn’t work

Despite stating the belief that the Glass-Steagall Act “helped to provide a way out of the worst global financial crisis to have occurred [in the US] before the present crisis”, the EU Parliament concedes that “there is no evidence from the past that a separation model could contribute in a positive way to avoiding a future financial crisis or to diminishing the risk of it”.

Banks are too big

Within the motion the Parliament clearly states the position that:

  • individual banks should not be allowed to become so large – even within a single Member State – that their failure causes systemic risks; and
  • the size of a Member State’s banking sector should be limited in terms of:
    • size – the suggestion seems to be that the ratio of private sector loans to GDP should not exceed 100%;
    • complexity; and
    • interconnectedness.

The resolution gives a clue as to the ‘look and feel’ of these smaller banks, urging the EU Commission, inter alia, to:

  • encourage a return to the partnership model for investment banking so as to increase personal responsibility;
  • ensure that remuneration systems prioritise the use of bail-in bonds and shares rather than cash, commissions or value-based items; and
  • rationalise the scale of the activities of banking groups.

SME’s Get Bail From Bail-in

Some noteworthy signs of progress over the weekend from the EU with respect to bail-in guidelines. The FT reported on Sunday night that a majority of the Council of Ministers supported an exemption for small and medium-sized enterprises (SMEs), as well as the widely-flagged exclusion of all deposits by individuals, from the ambit of bail-in provisions.

Broadly defined as enterprises with less than 250 employees and turnover no greater than €50m, SMEs are regarded as the engine of innovation and future growth, accounting for 75 million jobs and 99% of enterprises across the EU.

The bail-in mechanism forms one of the two “legs” which will comprise the single resolution mechanism.  Following the decision to create a single, separately capitalised bank supervisor, the delay in agreeing the broad outline of a single bailout authority is the main stumbling block in the implementation of a European banking union.

Despite the weekend’s advance, the specific national implementation of the bail-in proposals remains a source of multiple conflicts, with talks due to resume on Wednesday. Dissension is particularly acute between Euro and non-Eurozone countries, with respect to the bail-in implications of ECB liquidity provision and the Eurozone €500bn bailout fund.

EU Council Proposal Highlights Future Direction of RRD


On 20 June 2013, the Presidency of the Council of the EU published a note on the current “state of play” with respect to the Recovery and Resolution Directive (RRD), together with a compromise RRD proposal.  It also invited the EU Council to agree the compromise and mandate the Presidency to undertake negotiations with the EU Parliament with a view to reaching an agreement on the RRD as soon as possible.

The “state of play” summary focuses on the need to achieve an optimal balance between three interlinked elements of the RRD, dubbed the “Resolution Triangle”:

  • the design of the bail in tool;
  • minimum requirements for own funds and eligible liabilities (MREL); and
  • financing arrangements.

The Presidency has proposed a “mixed approach” to each ‘angle’ of the triangle, as set out below.

The Design of the Bail-in Tool (Article 38)

The Presidency is seeking to strike a balance between harmonisation and flexibility with respect to bail-in, proposing:

  • a limited discretionary exclusion for derivatives – this would only apply in particular circumstances and only where necessary to achieve the continuity of critical functions and avoid widespread contagion; and
  • a power for resolution authorities, available in extraordinary circumstances and limited to an amount equal to 2.5% of the total liabilities of the institution in question, to exclude certain other liabilities from bail-in where it is not possible to bail them in within a reasonable time, or for financial stability reasons.

Minimum Requirements for Own Funds and Eligible Liabilities (Article 39)

In recognition of the general consensus around the need for adequate MREL, but in an effort to marry the need for harmonisation in this area with the practical difficulty of defining an appropriate level of MREL (particularly with respect to different banking activities and different business models), the Presidency proposes that the MREL of each institution should be determined by the appropriate resolution authority on the basis of specific criteria, including:

  • its business model;
  • level of risk; and
  • loss absorbing capacity.

The concept of a minimum percentage of MREL for global SIFIs will not be pursued.

Financing Arrangements (Articles 92 and 93)

The key features of the Presidency proposal in this area are that:

  • Member States should be free to keep Deposit Guarantee Schemes (DGS) and resolution funds separate or to merge them; and
  • a resolution fund should have a minimum target level of:
    • 0.8% of covered deposits (and not ‘total liabilities’ of a Member State’s banking sector as suggested by some Member States) where kept separate from the DGS, or
    • 1.3% where combined with the DGS.

Other Issues

The Presidency proposes to maintain the current 2018 date for the introduction of bail-in, rather than bring that date forward to 2015 as suggested by some Member States.

EU Commission Extends Liikanen Consultation

The EU Commission has extended its consultation on reforms to the structure of the EU banking sector to 11 July 2013 according to its webpage.  The consultation was launched on 16 May 2013 and was expected to run until 3 July 2013.  The Commission is seeking views on policy options relating to the scope of banks potentially subject to structural separation.

FCA Continues the Focus on Client Assets

The Financial Conduct Authority has levied its first penalty under the new penalty regime for inadequate compliance with the Client Money rules.

On 11 June 2013, the FCA published details of the £120,900 fine (including a 20% discount for early settlement) levied on Xcap Securities (a retail stockbroking and asset management firm) for failure to protect client money and assets.  The fine amounts to 2% of Xcap’s average client money balance plus 0.2 % of its client asset balance during the relevant period.  This equates to a low-medium level fine according to the FCA 5 step process.  Among Xcap’s specific breaches were failures to:

  • ensure that client money was properly segregated;
  • ensure that all safe custody assets were clearly identified as belonging to the client;
  • maintain accurate records and accounts in respect of client money and safe custody assets;
  • have in place adequate organisational arrangements, policies and procedures to detect and manage client money and safe custody asset risks;
  • put in place adequate trust documentation;
  • carry out timely and accurate client money reconciliations; and
  • report without delay failures to comply with CASS requirements.

In the press release accompanying the final notice, the FCA noted that the new levels of penalty “are expected to result in larger fines, demonstrating the seriousness with which we view these failures and serving as a stronger deterrent to firms”.  Firms should take note and not expect sympathy.  Today, many of the gaps in client money processes which led to Xcap’s breaches would be highlighted to firms which establish robust procedures around the population and maintenance of a CASS Resolution Pack.  Whilst providing a smoking gun to the FCA in any client money investigation, if implemented correctly, a CASS Resolution Pack is also a powerful regulatory compliance tool, and even a competitive advantage instrument.  This case reinforces the need for firms to commit sufficient resource to improving standards in this area.

Bundesbank VP Calls for Single Resolution Authority

On Monday, Bundesbank Vice President Sabine Lautenschläger spoke out in favour of a single resolution authority at a conference in Berlin, according to this article.  She said an EU wide mechanism would be able to take a “bird’s eye view” of financial institutions allowing for an easier and quicker solution in crisis situations.  Lautenschläger added that it does not make sense to oversee banks at the European level while leaving their resolution to national authorities, although accepted that this would require amendment to EU treaties. 

Her comments are at odds with the German government which ideally seeks a network of national resolution authorities (although recently agreed to a “resolution board” made up of national authorities) and is resistant to any scheme that could empower an external agency to independently decide when to close a bank.  German Deputy Finance Minister Thomas Steffen, speaking at the same conference, said that the EU Commission would have a centralised resolution authority proposal soon. 

EU Commission Publishes Liikanen FAQs

On 7 June 2013, the European Commission published an FAQ document regarding its May 2013 consultation on the Structural Reform of the EU Banking Sector (the Liikanen Reforms) – see this blog post for more detail.  The FAQs have been drafted in response to requests for clarification about the data templates published as part of the May consultation and deal with the following issues:

  • The nature of the treatment afforded to confidential information submitted by respondents;
  • Scenario analysis, specifically:
    • the impact on the group’s balance sheet and P&L resulting from the enactment of CRDIV and the Bank Recovery and Resolution Directive;
    • whether the scenarios assume the existence of specific underlying corporate structures;
    • the extent to which a trading entity can be funded by deposits;
    • how netted derivatives are to be reported;
    • how “matched principal” trading, “provision of direct market access to customers” and hedging activity are to be treated in relation to market making;
    • how exposures to venture capital, private equity and hedge funds are to be defined; and
    • how short-term and long-term securities are to be distinguished.