Can the FSA’s RRP Guidance Survive the Test of Time?

As previously reported on this blog, on 20 February 2013 the FSA published an update to its Recovery and Resolution Planning guidance.  It was announced that, in the future, firms will not have to update their resolution information pack (RRP Modules 3-6) on an annual basis as a matter of process.  Instead, they will only be required to respond to requests for resolution planning information from their supervisors.

It seems difficult to reconcile the FSA’s new position with other RRP guidance.  The FSB’s “Key Attributes” document states clearly[1] that “supervisory and resolution authorities should ensure that RRPs are updated…at least annually or when there are material changes to a firm’s business or structure”, a requirement which is echoed in the draft Recovery and Resolution Directive[2] (RRD).  More generally, given the enormous amount of data processing effort that goes into updating a resolution plan in practice, it is difficult to see how any firm which does not follow processes designed to facilitate the periodic updating of a resolution plan could ever be taken to be in compliance with the “Key Attributes” requirements that it must be able to demonstrate an ability to produce the essential information needed to implement a resolution plan within 24 hours[3] or be capable of delivering sufficiently detailed, accurate and timely information to support an effective resolution[4].

Firms would also be forgiven for being confused as to how best to react to this guidance in light of other regulatory developments which offer incentives for those who are prepared to constantly seek to optimise their resolvability, including:

  • the additional loss-absorbency requirements of Basel III for Global Systemically Important Banks;
  • the Liikanen proposal that structural separation above and beyond that relating to ‘significant’ trading activities should be dependent on the robustness of RRPs; and
  • the Vicker’s recommendation that an additional levy of up to 3% of equity capital be required of a UK banking group that is judged “insufficiently resolvable to remove all risk to the public finances”.

Enhancing resolvability demands a proactive, rather than a reactive, approach to RRP legislation.  By its nature, the assimilation of resolution information is not a process that can be easily mothballed and simply dusted-down as and when required, particularly for firms operating in multiple jurisdictions.  Rather, if it is to mean anything, optimising resolvability requires huge commitment and continued cooperation on the part of both firms and authorities.  In light of the drafting of the “Key Attributes” document and particularly the RRD, it is at least questionable whether the new FSA guidance will survive the test of time.  The message to firms must surely be to note the FSA’s new guidance with interest but to continue on a ‘business as normal’ footing with their RRP preparations.


[1] “Key Attributes”, paragraph 11.10

[2] Article 9(3)

[3] “Key Attributes”, paragraph 12.2(iii)

[4] “Key Attributes”, Annex II, paragraph 4.14

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FSA Update on RRP and CASS RP

On 25 February 2013, the FSA published Policy Development Update Number 156 detailing forthcoming publications from the FSA on a wide range of issues, including:

  • RRP: Policy Statement to CP11/16 and PS12/5 on recovery and resolution planning.  This is expected to be published in Q2 2013; and
  • CASS RP: Policy Statement to CP 12/20, “Review of the client money rules for insurance intermediaries”. This will include finalised rules regarding CASS Resolution Packs for firms subject to CASS 5 and is expected to be published in Q3/Q4 2013.

FSA Updates RRP Guidance

The FSA has published an update to its Recovery and Resolution Planning (RRP) guidance dated 20 February 2013.

It expects to publish formal RRP rules “soon” after the FSA hands responsibility over to the Prudential Regulation Authority on 1 April 2013.  An updated RRP information pack for firms can be expected soon thereafter with subsequent updates aimed at aligning UK domestic requirements with Financial Stability Board guidance and the EU Recovery and Resolution Directive also expected.

In light of the experience of RRP submissions to date and international policy development, the FSA update also details the following two policy changes:

  • firms will be required to update recovery plans annually as part of their normal risk management procedures and submit it to supervisors for review when requested; and
  • firms will not have to update their resolution information pack (RRP Modules 3-6) on an annual basis as a matter of process. Instead, they should respond to requests for resolution planning information from their supervisors.

Defining Systemic Importance for Insurers

On 12 February 2013, Julian Adams, FSA Director of Insurance, gave a speech at the Economist Insurance Summit in London on the lessons for insurance supervisors from the financial crisis.

Mr Adams explained that the overall objective of the FSA is to create an environment in which no insurer is too big, too complex or too interconnected to fail, and where participants are able to exit the market in an orderly fashion which ensures continuity of access to critical services.

He noted that the UK currently does not have a resolution regime for insurers, instead relying on ‘run-off’, Schemes of Arrangement and formal insolvency.  However, each of these options carries attendant risks meaning that it is necessary to at least consider whether a resolution regime for insurers in necessary.  Any such regime would be consistent with the Financial Stability Board’s ‘Key Attributes’ document and would also take a lead from the International Association of Insurance Supervisors, which is due to publish its initial list of Globally Systemic Important Insurers in the summer of 2013.  The key challenge is to recognise the specificities of insurance compared to other financial sectors – particularly the factors that make an insurer ‘systemically important’.  On this topic, Mr Adams highlighted three issues:

Use of Leverage – such as:

  • engaging in stock lending in order to invest proceeds in higher yielding (and therefore higher risk) paper; or
  • facilitating borrowing by non-insurance group members on the strength of an insurance business;

Asset Transformation – such as the sale of long-term investment products by life insurance companies; or

Assumption of Credit Risk – such as:

  • the securitisation of corporate paper; or
  • the funding of annuity liabilities through exposure to subordinated corporate debt.

If the answer to any one of these questions, alone or in combination, is positive then the FSA would “consider carefully” whether the firm in question was systemically significant.

FSA Policy Statement on RRP Expected in Q2 2013

On 25 January 2013, the FSA published Policy Development Update Number 155.  This confirms that a Policy Statement on Recovery and Resolution Plans is now due to be published in Q2 2013.  The Policy Statement is the long-awaited follow-up to CP 11/16: “Recovery and Resolution Plans” published in August 2011.

CASS Resolution Pack Compliance: Don’t Expect Sympathy From the FSA

On 20 November 2012, the FSA published a speech given by Richard Sutcliffe, Head of the Client Assets Unit at the FSA on the background and purpose of the unit he leads and its future policy initiatives.

The speech underlined the priority given by the FSA to improving the client assets regime.  Mr Sutcliffe noted that there are over £9.7 trillion of custody assets within the UK, the protection of which is crucial if the FSA is to meet its objectives of protecting consumers and enhancing the integrity of UK markets.  In his words, CASS compliance is “not a regulatory fad, it is a fundamental duty” owed to customers.

The Client Assets Unit was created in the wake of the Lehman collapse and since that time has initiated a number of policy reforms, including:

  • the stratification of firms into “small”, “medium” or “large” based on the value of their holdings;
  • the requirement for all medium and large firms to submit a monthly Client Money & Assets Return; and
  • the introduction of the CF10a role – the dedicated control function with responsibility for client money compliance in all medium and large firms.

Mr Sutcliffe made clear that the FSA actively uses all of the material generated by firms and takes the issues of quality and accuracy of data very seriously.  Whilst acknowledging that progress has been made, he noted that concerns regarding CASS compliance remain – particularly the continuing failure of firms to properly document trust arrangements.  In light of these concerns the FSA will intensify its supervisory approach in the future, visiting more firms and returning to other firms to cover different issues or check on progress.

On the subject of CASS Resolution Packs, the FSA is aware of the costs involved in creating and maintaining a CASS Resolution Pack and the tight compliance deadlines.  However, it is not particularly sympathetic to the concerns of firms in this area on account of the fact that it is only asking for documentation which, in the main, should have been available to firms before the introduction of the CASS Resolution Pack requirements.

A CASS Resolution Pack provides a convenient snap shot of the state of a firm’s CASS compliance, which can be requested by the FSA at any time.  Given this, the particular concerns that that the FSA has regarding trust notifications and acknowledgments (which are required to be an immediately available component of every CASS Resolution Pack) and the stated intention to increase the intensity of future supervision, firms would be well advised to ensure that their approach to CASS Resolution Pack compliance is on a firm footing before the FSA next come knocking.

Living Wills to be a Condition of Authorisation?

This FT article reports on a speech given yesterday in Edinburgh by Andrew Bailey, director of banks and building societies at the FSA.  According to the report, any new entrant to the banking or insurance sectors will be required to produce a credible Living Will as a pre-condition to authorisation.

Concerns have been raised that this will further stifle competition, particularly in the banking sector.  However, the principle of requiring new entrants to consider issues relating to their ultimate resolvability from day one and factor any conclusions into initial business structures, seems an eminently sensible one.