HOT TOPIC THE UK'S RESOLVABILITY ASSESSMENT FRAMEWORK - PWC UK
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www.pwc.co.uk/fsrr
January 2019
Stand out for the right reasons
Financial Services Risk and Regulation
Hot topic
The UK’s Resolvability
Assessment Framework
Highlights
Background and timeline of developments
On 18 December 2018, the The Bank of England (‘BoE’) and the Prudential Regulation Authority (‘PRA’) published on 18
Bank of England (‘BoE’) and December 2018 proposals for establishing a Resolvability Assessment Framework (‘RAF’) with
the Prudential Regulation the primary objective to make banks accountable for their resolution preparedness. Ten years
Authority (‘PRA’) each issued since the financial crisis, the RAF represents the final major piece in the UK’s resolution regime.
proposals that collectively The RAF is designed to make resolution more transparent, better understood and to lead to a
establish the Resolvability more successful outcome. The proposals consist of the BoE’s consultation paper on the approach
Assessment Framework to assessing resolvability (‘BoE CP’) and the PRA’s consultation paper Resolution assessment
(‘RAF’). The Framework and public disclosure by firms (‘PRA CP’).
places the responsibility on
banks and building societies to The RAF is relevant to all firms whose failure would have a significant impact on the UK financial
demonstrate to the BoE and, system and where the BoE would use its stabilisation powers, that is, the bail-in tool or a partial-
for major UK firms, transfer resolution strategy. The proposals are also relevant for certain overseas firms where the
publically, their preparedness BoE would support the home resolution authority in carrying out cross-border resolution. The
for resolution, including RAF has been designed for the UK authorities to manage a firm’s failure regardless of the root
identification of risks for a cause of the problem; it is therefore an outcomes-based framework. For a firm to be considered
successful resolution outcome. resolvable, it must be able to demonstrate that it has adequate financial resources in resolution;
The RAF is the final major is able to continue its operations throughout resolution and restructuring; and can co-ordinate
piece in the UK’s resolution and communicate effectively internally and externally to ensure an orderly resolution.
regime ten years since the The proposals have been designed in the context of the current UK and EU regulatory framework
financial crisis and fulfils the and will be reviewed subject to any new arrangements between the UK and the EU. In addition,
BoE’s commitment to the PRA intends to consult on changes to its Senior Manager and Certification Regime
Parliament that major UK (‘SM&CR’) to incorporate the responsibility for carrying out the resolvability assessments. The
banks and building societies PRA also intends to review its policies regarding operational continuity in resolution (‘OCIR’) in
will be resolvable by 2022. light of feedback from firms on implementing the existing policies.
Through the RAF, firms will
need to take ownership of
their resolvability and develop
capabilities that ensure an
orderly resolution.1. What are the proposals? 2. Which firms are in-scope?
The two proposals that collectively form the basis for the RAF The PRA’s proposed rules will apply to all UK banks and
have three key components: building societies with £50bn or more in retail deposits on an
individual or consolidated basis, as at the date of their most
The BoE’s assessment of resolvability recent annual accounts. In other words, the PRA intends to
The BoE CP outlines the outcomes the BoE considers apply the rules to those firms whose failure would have the
necessary for firms to demonstrate resolution largest impact on UK financial stability and would pose the
preparedness. The outcomes build on existing work greatest risk to the PRA’s and BoE’s statutory objectives.
that firms have done but also includes new proposed
policies to remove barriers to resolvability. To facilitate The BoE CP however, has a wider scope as it outlines how
the development of firms’ readiness with respect to a it would perform its resolvability assessment on all firms it is
bail-in resolution strategy, the BoE provides a stylised responsible for. It is therefore relevant to all UK incorporated
timeline for resolution, which is set out as three firms where the BoE has notified them of their preferred
phases (i) pre-resolution contingency planning; (ii) the resolution strategy being ‘bail-in’ or partial transfer. The BoE
resolution weekend; and (iii) the bail-in period. The CP is also relevant to firms where the BoE in its capacity as
BoE is not consulting on the stylised timeline, but host Resolution Authority has notified them that they are a
welcomes views on the capabilities that would be ‘material subsidiary’ of an overseas-based banking group for
needed to support the decisions and actions set out the purposes of setting internal MREL in the UK.
therein.
The PRA, in consultation with the BoE, may consider at a
PRA’s expectations for assessing resolution later date whether and how to apply some or all its proposals
preparedness for firms with £50bn or more to firms with a bail-in or partial transfer resolution strategy.
retail deposits
Firms in-scope of the PRA CP will be required to 3. What makes firms
identify any risks to their successful resolution and the
plans they have in place to mitigate such risks. Firms resolvable?
will need to submit their assessment report to the PRA
and to publish a summary of their most recent report, For firms to be resolvable and their resolution strategies
i.e. the public disclosure requirement. The PRA effective, any significant barriers to resolution need to be
puts significant emphasis on the accountability of identified and removed. To date, the BoE has worked with
senior management within the firm for both the the Financial Stability Board (‘FSB’) to identify eight generic
assessment and related disclosures. impediments to resolvability and developed domestic policy
around these. The BoE has also informed firms of the
BoE public statement on resolvability of each barriers it has identified as part of the resolvability
firm in-scope of the PRA CP assessments it has performed to date. The BoE CP sets out
Through a public statement, the BoE will identify any the proposed new policy for four of the generic
shortcomings and where firms may be required to do impediments to complement existing policy on loss
more work to become resolvable. absorbency capacity (‘TLAC/MREL’), operational continuity
in resolution (‘OCIR’) and valuations in resolution. The new
In its capacity as Resolution Authority, the BoE has statutory policy captures:
responsibilities to draw-up resolution plans and assess
resolvability for all UK-incorporated banks and building Funding in resolution;
societies as well as those investment firms that are required Continuity of access to financial market infrastructures
to hold initial capital of €730k, in particular those that deal (‘FMIs’);
as principal. The RAF package does not replace the BoE’s Post-stabilisation restructuring; and
annual resolvability assessment, rather it helps inform that Management, governance and communications in
assessment. Following the resolvability assessment, the BoE resolution.
will inform the firm of any substantive impediments to Going forward, the RAF will form the basis against which the
resolvability. The firm has four months to make a proposal to BoE will assess whether firms are implementing the relevant
remove any identified impediments. If the firm’s proposal is policies to achieve certain outcomes to eliminate the barriers.
insufficient or no proposal is received, the BoE must use its The table below shows the direct mapping between the eight
powers to require the firm to address the impediments1. barriers to resolvability and the desired outcomes against
The BoE will ensure that its public statement for firms in- which firms can demonstrate their resolvability. These are
scope of the PRA CP is consistent with its annual resolvability the minimum barriers firms should consider, and as part of
assessment and the summary of the resolution plan it sends their own assessment they should aim to identify any other
to firms annually. barriers relevant to their business model, legal entity
structure and resolution strategy (Single Point of Entry ‘SPE’
or Multiple Point of Entry ‘MPE’).
1Statement of Policy: The Bank of England’s power to direct enforcement powers include public statement, penalty, direction to
institutions to address impediments to resolvability, December refrain from any conduct and prohibition from holding office.
2015. Under sections 83ZQ-83ZY of the Banking Act 2009, general
2 Hot Topic Financial Services Risk and RegulationTable 1: Link between resolvability barriers and achieving key information, easily understandable by readers and
the desired outcomes for firms to be resolvable typically around 250 pages in length. The PRA also sets out
Resolvability Firms’ capability
general guidance on the report contents.
Outcome
barrier (‘steady-state’ readiness)
It is clear that the PRA does not expect firms to treat the
Maintains a sufficient amount of
resources that can credibly and feasibly assessment and report preparation as another regulatory
Loss Absorbency
Capacity
be used to absorb losses and recapitalise compliance or data collection exercise.
them to a level that enables them to
(‘MREL’)
continue to meet threshold conditions
1. Financial
and sustain market confidence
5. What do firms need to
publically disclose and by
Allows an independent valuer to carry out
Resources
Valuations sufficiently timely and robust valuations
to support effective resolution
Funding in
Able to estimate, anticipate and monitor
potential liquidity resources and needs
when?
Resolution and mobilise liquidity resources as firms Firms will be required to disclose publically a summary
nears and throughout resolution
of the resolvability assessment report that is
Financial
Addresses the risk of early termination of submitted to the PRA. The summary document should
financial contracts upon entry into
Contracts
resolution
provide sufficient detail on the current state of resolvability
of the firm and the steps it is taking to become fully
Ensures continuity of banking services
Operational and critical functions through operational resolvable. Although details of resolvability arrangements
Continuity continuity arrangements at the point of and of resolution preparedness plans are not expected to be
(OCIR) resolution and permits post-stabilisation
restructuring published, an anticipated timeline for completion of the
resolution preparedness plans and existing controls should
Maintains continued access to clearing,
payment, settlement, and custody be referenced. It is important to note that firms are not
2. Continuity
Access to FMIs
services in resolution (recognising that expected to include an overall judgment of their resolvability
providers of these services may retain
some discretion over their ability to as part of their public disclosure.
terminate the firm’s membership)
Under the PRA’s proposals, the kick-off point of the first
Able to identify, develop and execute
post-stabilisation restructuring options
RAF cycle is set for September 2020 at which time the
on a timely basis to ensure that post firms will submit the assessment report to the PRA (and
resolution (i) the firm can return to
Restructuring
fulfilling regulatory requirements on a every two years thereafter). The timing of the first cycle is
forward-looking basis; and (ii) to return intended to allow the first reports to be issued by the firms to
to a viable business model that is
sustainable over the long-term
reflect changes in the firms’ structures as a result of the
implementation of the ring-fencing rules and changes
Ensures key roles are adequately staffed
and incentivised during execution of required by the UK’s planned withdrawal from the EU.
3. Co- Management,
resolution: (i) governance arrangements
ordination and Governance and
Communication Communications
provide effective oversight and decision- Following report submission, the PRA and the BoE will
making; (ii) deliver timely and effective
communications
review firms’ submissions and conduct assurance on firms’
resolvability. Once the PRA and BoE review and assurance
is completed, the firms will be required to publically disclose
a summary of their report. Firms are expected to disclose
4. What do firms need to publically a summary of their first report in May
2021.
assess and report?
The PRA expects in-scope firms to perform realistic 7. What will the Bank of
assessments of their preparation for resolution and submit a
report of their own assessment that informs the PRA of the England disclose?
following: The BoE proposes to make a public statement on the
resolvability assessments made by the firms in-scope of the
The firm’s understanding of how it would be PRA proposals. The BoE will measure progress on a firm-by-
resolved at the point of failure; firm basis to identify the gaps towards meeting end-state
The firm’s identification of risks to an effective resolvability and to identify best practice rather than provide
resolution; and an opinion as to whether a firm is resolvable at that point in
The firm’s approach to removing or reducing the time. This should prevent the public domain from forming
risks identified. any misleading views in relation to the outcome of a
The PRA expects firms to consider a stylised resolution resolution which might undermine market confidence. The
timeline as a reference tool when developing the assessment. BoE expects that firms will make steady progress over time
More importantly, firms are expected to undertake testing of and should not backload their internal preparedness
their resolution preparedness to substantiate their programs into 2021 and 2022 given the various building
assessments and to assist them in developing steps to blocks of the assessment framework.
mitigate or reduce the risks. The testing and the review of the More importantly, the BoE expects that it will issue the public
preparations needs to be undertaken at a suitable frequency statements at the same time that firms release their own
to ensure that the assessment remains up-to-date and assessment or shortly thereafter. The BoE welcomes
accurate. Firms must therefore establish appropriate feedback on the timing of its disclosures from all
governance, BAU procedures and controls to ensure that the stakeholders. However, it envisions that all firms in-scope of
assessment is reviewed by the firm on a timely basis if there the PRA rules will publish their disclosures at the same time
are any material changes or where evidence suggests that the to ensure that no one firm is favoured over another in the
assessment is no longer accurate. context of peer comparisons and market transparency.
The PRA does not propose any detailed requirements for the
reporting format. The reports are expected to be focussed on
3 Hot Topic Financial Services Risk and RegulationWhat do I need to do?
Given the breadth of the RAF requirements, we recommend a structured approach to the initial and longer term
regulatory response. We recommend that you:
Engage with the PRA and BoE to give feedback on the proposals, in particular taking into consideration your
firm’s business model, structure and resolution strategy, the work performed to date and ‘lessons learnt’ for
resolution preparedness.
Define your own internal view of future resolution capabilities taking into consideration your business model
and legal entity structure, and how these could be practically implemented to produce similar outcomes as
those set out in the BoE CP.
Undertake a first assessment of the proposals to understand what the incremental ask is in terms of
governance, processes, controls, data, testing and reporting that is already in place as part of resolution
planning and related programs such as OCIR. This will enable you to understand the gaps and to develop an
appropriate plan and a target operating model for resolvability assessments as well as to identify the
resources, budget and headcount required to achieve the expected outcomes.
Given the current EU Withdrawal environment, monitor future UK and EU requirements and where relevant,
ensure your firm’s capabilitites can dynamically respond to changing requirements.
Engage with your shareholders, investors and customers to understand their preferences in terms of the
information that will be publically disclosed and that meets PRA’s expectations. In particular, source views
from existing investors’ presentations and disclosures, for example on loss absorbency capacity as to their
usefulness and clarity of messaging.
Focus on leveraging data and technology solutions to ensure the most efficient BAU environment is developed
and be transparent on the additional BAU benefits to meet regulatory compliance.
Develop early both the BAU and Programme Assurance related workstreams that include 1st and 2nd Line of
Defence stakeholders to ensure your resolvability assessment considers existing assurance, including
monitoring and testing activities, in the design phase.
Recognise the importance of governance in a multi-year programme to ensure senior management supports
the initiative throughout the programme cycle and effective transition into BAU.
Begin now - mobilise a senior steering committee and establish key design principles and success measures;
refine and mobilise long term project team once the final policy is published.
If you would like to discuss any of the issues outlined in this paper, please speak to your usual PwC
representative or one of contacts below.
Contacts
Anna Cox James Hewer Jane Woolcott
Director, RRP Lead Partner, Prudential Regulation Partner, Risk Assurance Leader
anna.b.cox@pwc.com Leader jane.j.woolcott@pwc.com
+44 (0) 7764 958 164 james.hewer@pwc.com + 44 (0) 7715 010 942
+ 44 (0) 7718 778 679
Philip Raines Attul Karir Mike Jervis
Partner, Consulting RRP Lead Partner, Valuations Partner, Business restructuring
philip.j.raines@pwc.com attul.karir@pwc.com mike.jervis@pwc.com
+ 44 (0) 7714 567 350 +44 (0) 7931 735 202 +44 (0)7768 336 225
James Moseley Leigh Bates Agatha Pontiki
Director, Solvent Wind Down Lead Partner, Data Senior Manager, RRP
james.w.moseley@pwc.com leigh.bates@pwc.com agatha.pontiki@pwc.com
+44 (0) 7595 849 787 +44 (0) 7711 562 381 +44 (0) 7730 067 469
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