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 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.

Congratulations on the Completion of your CASS Resolution Pack! Now comes the hard part…

Introduction

Today marks the deadline for completion of a CASS Resolution Pack with respect to every investment firm to which CASS Chapter 6 (custody rules) or Chapter 7 (client money rules) applies.

The CASS Resolution Pack regulations are documented in PS12/6, published by the FSA in March 2012.  They require a firm to collate certain information regarding its handling of client money and safe custody assets that would be of use to an insolvency practitioner in the event of the firm’s failure.  The purpose of the rules is to facilitate the return of client money and safe custody assets to clients more quickly than is currently the case.

The Burden of Maintenance

At least in theory, the creation of a CASS Resolution Pack is a reasonably simple exercise.  However, in practice, the CASS Resolution Pack requirements imply a significant ongoing maintenance burden on firms due to the nature of the documentation forming part of the pack and the requirements regarding retrieval and updating of the pack’s contents.

The ’48 Hour Rule’

The documentation forming part of a CASS Resolution Pack must be capable of being retrieved within 48 hours of (a) the appointment of an insolvency practitioner or (b) the request of the FSA, irrespective of whether the firm in question is a going concern or has entered into insolvency/resolution.  It is worth noting that the 48 hour period continues to run whether the days in question are business days or non-business days. Moreover, where documents are held by a member of the firm’s group, the firm must have adequate arrangements in place to ensure that documents are still delivered within the 48 hour timescale.

The ‘Immediately Retrievable’ Rule

Certain documentation must be capable of being retrieved immediately so as to assist an insolvency practitioner in identifying and freezing client assets.  Additionally, firms should note that the FSA may rely on the inability of a firm to provide ‘immediately retrievable’ documentation as tending to establish that the firm is in contravention of the general requirement that documents be retrievable within 48 hours.

Inaccuracies and Corrections

Firms must ensure that the contents of a CASS Resolution Pack are reviewed on an ongoing basis to ensure that the pack remains accurate.  In addition, material inaccuracies in the content of any new documentation required to be produced as a result of the CASS Resolution Pack rules must be corrected within 5 business days of the inaccuracy arising.

The Future

To date, many firms have put in place a tactical, rather than strategic, solution to the issue of CASS Resolution Packs.  These first generation CASS Resolution Packs are generally created in MS Word or MS Excel.  Whilst easy to create and being fully compliant with the regulations, these products suffer from multiple user and data integrity issues.  Moreover, they are likely to come under further strain as recently proposed changes to the CASS regime, in particular the ability to create multiple legally and operationally separate client money pools and sub-pools, increase yet further the burden associated with maintaining a CASS Resolution Pack.  As a result, they are not well suited to being the foundation stone upon which an efficient and robust CASS Resolution Pack maintenance policy can be built.

However, the future is almost upon us.  We are already starting to see the emergence of second generation CASS Resolution Packs in the form of bespoke CASS RP databases.  In terms of speed and efficiency of updating, multiple-user access and data integrity, the longer-term advantages of these products is clear.  However, the main driver behind this development is not primarily the question of maintenance, but rather the appreciation of the value of a robust CASS Resolution Pack as a risk management tool, used to identify weakness in existing client money processes.  Indeed, discussions are already turning to the creation of third generation CASS Resolution Packs – being CASS Resolution Packs the contents of which are drawn automatically from existing systems and update, at least in part, on a semi-automatic basis.  It is at this point that the true value of the CASS Resolution Pack, as a competitive advantage tool demonstrating the robustness of client money systems and used in the marketing of a firm to new and existing clients, will be fully realised.

An RRP Timeline

Here is a link to an RRP Timeline.  I hope that you find it useful.

The yellow flags highlight some of the events which resulted in the initial RRP initiative.  The green flags represent the regulatory initiatives related to RRP, and the red flags show some of the deadlines that will apply to market participants affected by RRP legislation.

Apologies for the fact that it’s rather cluttered – there has been a lot happening with respect to RRP recently!  However, I wanted to set a bit of a benchmark with the first timeline.  Over time, I will update this, but focus more on future regulatory initiatives and deadlines and less on past events.

Seminar on Preparing a Recovery and Resolution Plan

On 13 July 2012, DRS, together with SNR Denton, will be presenting a half-day workshop on the law and practice relating to Living Wills at the British Bankers’ Association headquarters in London.  The latest regulatory guidance on RRP will be discussed, including:

  • The FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions” Discussion Paper;
  • The FSA’s Feedback Statement 12/1;
  • The EBA Discussion Paper on a Template for Recovery Plans; and
  • The draft EU Directive Establishing a Framework for the Recovery and Resolution of Credit Institutions.

Specifically, we will be suggesting a template for a recovery plan and discussing some of the practical issues currently facing market participants in completing their RRP submissions as well as some possible solutions.

More information about the event and an online registration form are available here.

Please join us if you can.  If you aren’t able to attend on the day but are nonetheless interested in the subject, just let me know and we’d be happy to make alternative arrangements.  My contact details are on the “About” page of this blog.

Webinar on CASS RP: 21 June 2012

With the 1 October 2012 deadline for CASS RP beginning to loom large, DRS, in association with Derivsource, is giving a free webinar on the law and practice relating to CASS RP on 21 June 2012 (10 am EST / 3pm BST).  We will be looking at such topics as:

  • Background to CASS RP (CP11/16 and PS12/1)
  • The challenges of creating a CASS RP
  • Maintaining a CASS RP
  • The links between CASS RP and RRP.

You can register for the event here:

https://deriv.webex.com/mw0306ld/mywebex/default.do?nomenu=true&siteurl=deriv&service=6&rnd=0.32208606094562064&main_url=https%3A%2F%2Fderiv.webex.com%2Fec0605ld%2Feventcenter%2Fevent%2FeventAction.do%3FtheAction%3Ddetail%26confViewID%3D660867327%26%26%26%26siteurl%3Dderiv

CASS Resolution Packs: The 1 October 2012 Deadline Looms

Introduction

Any UK firm which is subject to CASS 6 (custody rules) and/or CASS 7 (client money rules) is obliged to have a CASS Resolution Pack in place by 1 October 2012.

CASS Resolution Packs form part of the FSA’s wider review of the client assets regime in the UK and represent the point where the client money rules meet resolution planning.  The rules require a firm to collate certain information regarding its handling of client money and safe custody assets that would be of use to an insolvency practitioner in the event of the firm’s failure.  The purpose of the rules is to facilitate the return of client money and safe custody assets to clients more quickly than is currently the case.

Creating a CASS Resolution Pack

In theory, a CASS Resolution Pack should be relatively straightforward to produce.  Broadly speaking, the exercise breaks down fairly neatly into four main areas:

  • analysis of the institutions with which client money or safe custody assets have been placed by the firm;
  • analysis of the documentation in place with the firm’s clients;
  • identification of the employees of the firm who are critical or important to the performance of the firm’s CASS obligations; and
  • third parties and systems on which the firm is reliant for performance of its CASS obligations.

Practical Issues to Bear in Mind

Although the theory behind CASS Resolution Packs is easy to understand, the reality of CASS Resolution Pack creation is sometimes rather different.  Some firms are currently unaware of the location of all of the documentation required as part of a CASS Resolution Pack – a necessary first step in preparing the pack itself.  In addition, the CASS Resolution Pack rules require firms to have arrangements in place to ensure that electronic systems which are important to CASS compliance remain operational and accessible following the firm’s failure.  As such, all such contracts will require review and it may be necessary to approach the vendors of any such systems with a view to renegotiation of contractual terms – a process which often proves protracted.

Questions also remain as to the form the CASS Resolution Pack should take.  PS12/6, the FSA’s Policy Statement on CASS Resolution Packs, is silent on this issue.  CASS Resolution Packs in both Word and Excel formats exist, and databases designed specifically for the task of creating a CASS Resolution Pack are being developed.  All formats have their pros and cons.  The key factors to consider in choosing the form of a CASS Resolution Pack are:

  • size of the firm – the larger the CASS operation of the firm the more robust the CASS Resolution Pack needs to be due to the sheer volume of documentation which must be assimilated into the pack itself and the requirement for collaborative input from multiple users in order to bring the pack together;
  • ease of maintenance – any change of circumstances which renders the content of a document forming part of the CASS Resolution Pack inaccurate must be corrected within 5 Business Days.  In reality, CASS Resolution Packs for Large CASS firms are likely to be in a constant state of updating and any solution chosen by such firms must be robust enough to accommodate this;
  • flexibility – it seems likely that the rules on CASS Resolution Packs will have to be amended in the future to accommodate any changes resulting from the FSA’s general review of the UK CASS regime.

Cass Resolution Packs in Word are relatively quick and cheap to create.  However, they are not well suited to collaborative working in terms of data input and suffer from issues associated with maintaining data integrity.  I wouldn’t recommend using Word for any but the smallest firms.  Excel is definitely a step forward as data can more readily be filtered and analysed.  Again, however, the problems associated with sharing of Excel workbooks is well known and data validation is difficult to maintain over time and between multiple users.  Bespoke databases do not suffer from these problems but clearly entail greater expense and a longer lead time to develop.  However, on balance, I believe that they are the most appropriate solution, at least for CASS Large firms.

The FSA has made clear in its 2012-13 Business Plan that the protection of client assets sits right at the top of its agenda and it will be increasing scrutiny of firms in this area, particularly those that are systemically important.  Following the MF Global fiasco, one can only assume that regulatory oversight in this area will increase yet further.  As such, there is clear value for firms in getting CASS Resolution Pack planning right.  With just over four months left until the rules come into force, there is still enough time to complete the process, but please don’t expect this to be something that can just be cobbled together at the last minute.

The FSA’s policy statement on CASS Resolution Packs can be downloaded via this link:

http://www.fsa.gov.uk/static/pubs/policy/ps12-06.pdf