The Bank Recovery and Resolution (No. 2) Order 2014

EXPLANATORY NOTE

(This note is not part of the Order)

This Order is one of the instruments which implements Directive 2014/59/EU of the European Parliament and of the Council of 15th May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (OJ No. L 173, 12.6.2014, p. 190) (“the Directive”). The Directive requires EEA States to have powers to manage the failure of credit institutions, investment firms and companies in the same group as a credit institution or investment firm as an alternative to insolvency.

This Order lays down procedural and other requirements with respect to planning and taking measures for the purpose of—

• restoring the financial position of credit institutions and investment firms and prescribed kinds of parent and subsidiary companies; and

• achieving one or more resolution objectives, which include protecting and enhancing the stability of the financial and banking system, ensuring the continuation of critical functions and protecting depositors and public funds.

In the United Kingdom a credit institution is a bank or a building society and an investment firm is a body of the kind described in section 258A of the Banking Act 2009 (c. 1) (“the Act”). In the Directive credit institutions and investment firms are called “institutions”. The Directive applies to institutions and group companies throughout the EEA.

The Directive sets out the measures that may be taken for these purposes (“resolution tools” and “resolution powers”). In the United Kingdom they include—

• the stabilisation options referred to in paragraphs (a), (b), (ba) and (c) of section 1(3) of the Act (transfer to a private sector purchaser, transfer to a bridge bank, the bail-in option and transfer to an asset management vehicle);

• the powers exercisable by the Bank of England (“the Bank”), the Prudential Regulation Authority (“the PRA”), the Financial Conduct Authority (“the FCA”) or the Treasury under Part 1 of the Act (special resolution regime); and

• the Treasury’s general law power to re-capitalise a bank or other undertaking (the public equity support tool described in Article 57 of the Directive).

Article 2 contains definitions.

The expression “appropriate regulator” is defined separately for—

• institutions which are not part of a group which is subject to the requirements of the Directive; and

• groups which are subject to those requirements (“relevant groups”) and UK authorised persons which are part of a relevant group.

A “competent authority” is a public authority which has the function of supervising institutions as part of the supervisory system in operation in an EEA State.

The “consolidating supervisor” is the competent authority responsible for the exercise of supervision on the basis of the consolidated situation of institutions which are part of a relevant group (“consolidating situation” has the meaning given by point (47) of Article 4.1 of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26th June 2013 on prudential requirements for credit institutions and investment firms (OJ No. L 176, 27.6.2013, p. 1-137)).

Part 2 designates the Bank as the authority empowered to apply the resolution tools and exercise the resolution powers, and designates the FCA, PRA and the Bank for different purposes in connection with the exercise of power to write down or convert capital instruments. It also designates the Treasury as the ministry responsible for exercising the functions of the competent ministry under the Directive.

Part 3 makes general provision for recovery and resolution planning, including provision for applying less onerous obligations than would otherwise be applicable under Part 4 or 5.

In Parts 4, 5, 6, 8, 9 and 13 provision is made first for institutions authorised by the PRA or FCA which are not part of a relevant group, secondly for relevant groups for which the PRA or FCA is the consolidating supervisor, and thirdly for relevant groups for which the consolidating supervisor is in another EEA State. In Parts 7, 10 and 16 (which apply only to relevant groups) different provision is made for groups for which the PRA or FCA is the consolidating supervisor and groups for which the consolidating supervisor is in another EEA State.

Part 4 lays down the procedure to be followed by the appropriate regulator for assessing and reviewing recovery plans and group recovery plans and taking measures to maintain or restore the viability or financial position of an institution.

Parts 5 and 6 lay down the procedure to be followed by the Bank for the adoption and review of resolution plans and group resolution plans, for making assessments of resolvability for those purposes and for the removal of impediments to resolvability.

Part 7 lays down procedure for authorising agreements for the provision of financial support to a group entity which is an institution and meets the conditions for early intervention referred to in Article 27.1 of the Directive. Group financial support may be provided by a parent undertaking of a prescribed kind, which includes a mixed activity holding company, or by a prescribed kind of subsidiary. Provision is made for—

• the authorisation of agreements for group financial support by competent authorities;

• the approval of authorised agreements by parent and subsidiary undertakings set up in the UK; and

• the provision of financial support under authorised agreements.

Part 8 lays down the procedure to be followed by the appropriate regulator for determining whether measures for early intervention should be taken with respect to institutions and group entities. A measure for early intervention is a measure of a kind specified in sub-paragraphs (a) to (h) of Article 27.1 of the Directive.

Part 9 provides for the determination of the minimum requirement for own funds and eligible liabilities for institutions and group entities, and the determination of the minimum level of own funds and eligible liabilities of group institutions expressed as a percentage of the total liabilities and own funds of those institutions.

Part 10 lays down the procedure to be followed by the Bank for writing down or converting capital instruments of group entities under section 6B of the Act.

Part 11 makes provision about the removal of procedural impediments to the application of the bail-in tool referred to in section 1(3)(c) of the Act.

Part 12 makes provision about the treatment of derivative contracts where the bail-in option is applied by the Bank.

Part 13 lays down the procedure to be followed by the Bank for assessing business reorganisation plans drawn up by institutions and group entities following the application of bail-in option.

Part 14 lays down the procedure to be followed by the PRA, the FCA and the Bank where an undertaking is failing or likely to fail (within the meaning given in Article 32.4 of the Directive).

Part 15 makes provision for a stay of legal proceedings and with respect to remedies on judicial review where the Bank takes measures of a kind referred to in that Part when applying resolution tools or exercising resolution powers.

Part 16 makes provision about cross-border group resolution. It lays down requirements for the establishment and operation of resolution colleges and European resolution colleges, and lays down the procedure to be followed by the Bank for the adoption of plans drawn up for the purposes of group resolution in accordance with Article 91 of the Directive.

Part 17 applies company law with modifications to UK-registered companies which are subject to the application of resolution tools or the exercise resolution powers, including the application by the Treasury of the public equity support tool described in Article 57 of the Directive. Part 17 and Schedule 4 remove obstacles to the effectiveness of the tools and powers.

Part 18 makes provision to enable the Treasury to give support to investment firms under section 228 or 229 of the Act.

Part 19 makes miscellaneous provision.

Part 20 and Schedule 3 amend primary and secondary legislation. The amendments include—

• amendments of Chapter 1 of Part 9A of the Financial Services and Markets Act 2000 (c. 8) (rule-making powers of the FCA and the PRA) to reflect provision made in the Directive about recovery plans and resolution plans; and

• amendments of the Financial Services and Markets Act 2000 (Prescribed Financial Institutions) Order 2013 (S.I. 2013/165) to ensure that powers exercisable in relation to parent undertakings under Part 12A of the Financial Services and Markets Act 2000 are exercisable, so far as necessary, in relation to parent undertakings within the scope of the Directive.

Article 227 requires the Treasury to review the operation and effect of this Order and to publish a report within five years beginning with the date on which it comes into force and within every five years after that. Following a review it will fall to the Treasury to consider whether the Order should remain as it is, or be revoked or amended. A further instrument would be needed to revoke or amend the Order.

A Transposition Table setting out how the Directive is transposed into UK law is available from HM Treasury, 1 Horseguards Road, London, SW1A 2HQ or on http://www.hm-treasury.gov.uk.

An impact assessment has not been produced for this instrument as no significant impact on the costs of business or the voluntary sector is foreseen.