HM Treasury Publishes Response to Proposal on BRRD2 Transposition
HM Treasury published a document that summarizes the responses received from a consultation on the approach of UK to transposition of the revised Bank Resolution and Recovery Directive (BRRD2). The document also sets out the approach of government to the implementation of the Directive and provides an update on the forthcoming legislation. The government will implement the EU legislation that requires transposition before the end of 2020 and will, therefore, not transpose the provisions of BRRD2 that will apply to firms after the end of the transition period. The government will shortly lay out the statutory instrument for BRRD2 in Parliament to meet the EU’s transposition deadline of December 28, 2020.
The resolution regime provides the financial authorities (FCA, BoE, and HM Treasury) with powers to manage the failure of financial institutions in a way that protects depositors and maintains financial stability, while limiting the risks to public funds. BRRD2 updates the minimum requirement for own funds and eligible liabilities (MREL) framework and the powers that financial authorities have to resolve a failing bank. The consultation on transposition of BRRD2 ran from June 23, 2020 to August 11, 2020, during which time the government received 9 written responses. The respondents are the Association for Financial Markets in Europe (AFME), Building Societies Association (BSA), Bank of New York Mellon, Financial Markets Law Committee (FMLC), Herbert Smith Freehills, International Swaps and Derivatives Association (ISDA), International Securities Lending Association (ISLA), Lloyds Banking Group, and UK Finance. The two provisions that the government intends to transpose into regulatory rules are the new Article 44a of BRRD2 using FCA rules and the new Article 71a by simply including the new pre-resolution moratorium power within the definition of "crisis management measure" in the 2009 Banking Act. This will mean that no changes of substance are required to the PRA’s stay rules, and so will not require firms that are already compliant with the PRA’s stay rules to repaper contracts.
However, the government will not transpose provisions that apply to firms after the end of the transition period. Additionally, PRA intends to revoke any regulatory and implementing technical standards (RTS and ITS) that relate to provisions not implemented or not suitable for the UK that are developed by EBA and adopted by EC by the end of the transition period. PRA also intends to include sunset clauses in the secondary legislation transposing BRRD2 for the following provisions, which will cease to have effect in the UK from January 01, 2021:
- Article 1(6) of BRRD2, which inserts a new Article 16a in BRRD to provide the resolution authority with the power to prohibit an entity from distributing more than the "Maximum Distributable Amount" relating to the minimum requirement for own funds and eligible liabilities (M-MDA), where the entity fails to meet the combined buffer requirement, subject to certain conditions. The article also sets out the way in which the M-MDA should be calculated.
- Article 1(12), which inserts a new Article 33a in BRRD to introduce a pre-resolution moratorium power. The inclusion of the pre-resolution moratorium power within the definition of "crisis management measure" in the 2009 Banking Act will also be sunsetted.
- Article 1(20) of BRRD2, which introduces Article 48(7) of BRRD, making changes to priority of debts in insolvency.
- Article 1(21) of BRRD2, which updates Article 55 of BRRD on the contractual recognition of bail-in. The existing PRA Rules on contractual recognition of bail-in will be revoked from December 28 for the remainder of the transition period and new PRA rules will have effect from January 01, 2021. PRA will conduct a public consultation on changes to PRA rules on contractual recognition of bail-in.
- Article 1(30), which amends the existing in-resolution moratorium power under Article 69 of BRRD.
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Keywords: Europe, EU, UK, Banking, BRRD2 Transposition, BRRD2, Resolution Framework, Basel, Brexit, HM Treasury
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