A. Strong Institutional Framework

6. The U.K. financial safety net is underpinned by strong institutional arrangements. The financial safety net is made up of HMT, the BoE, the PRA, the FCA, and the FSCS. Significant institutional reforms have been undertaken since the last crisis, with the transfer of microprudential regulation from the Financial Services Authority to the PRA and the FCA, and the establishment of a macroprudential oversight mandate within the BOE, executed through an independent FPC. Roles and responsibilities are supported by strong legal mandates (Box 1).

7. The authorities have mutually-reinforcing roles and responsibilities. The BoE’s financial stability and resolution mandates are supported by HMT, as well as the PRA, FCA, and the FSCS. HMT works closely with the BoE to monitor and respond to financial sector risks, while the PRA and FCA contribute to maintaining financial stability through their respective regulatory and supervisory mandates. In particular, the PRA ensures that its regulated firms carry out business in a safe and prudent manner and that, if the need arises, they can be resolved in an orderly manner. The FCA, from a consumer protection and market integrity perspective, seeks to ensure that the resolution strategy/resolution tools applied when an institution fails, promotes depositor protection, continuity of access, and adequate redress and remediation where necessary. The FSCS ensures prompt compensation of insured depositors or, otherwise works with other authorities to facilitate maintaining continuity of access to deposits, thus promoting depositor confidence. The FSCS also works on public awareness of depositor protection.

8. HMT plays a very important role in the financial safety net, which reflects its interest in safeguarding financial stability and the use of public funds. HMT reserves decisions involving the use of public funds and is able to take direct action to stabilize failed institutions under exceptional circumstances⁹ through use of the temporary public ownership (TPO) tool, while having regard to the special resolution objectives.¹⁰ The BoE has a statutory duty to consult with HMT in the process of determining whether conditions for resolving banks, building societies and certain investment firms have been met. HMT may also direct the BoE to provide ELA to a financial institution, or to use a stabilization option or other resolution options, where there is a material risk to public funds and such action is necessary to resolve or reduce serious threats to the U.K. financial system.¹¹ The authorities consider HMT’s directive powers as backstop powers, which they believe are not likely to be used except when absolutely needed in the public interest. The authorities appear mindful of the need to ensure that the BoE as monetary and resolution authority maintains its operational autonomy.¹²

9. Strong cooperation exists among the domestic authorities in the area of crisis management and resolution, aided by a number of mechanisms. In particular:

• Statutory requirements: There are a number of statutory requirements for cooperation. For example, the BA establishes consultative processes between the BoE, PRA, FCA, and HMT for determining whether conditions have been met to trigger resolution for banks, building societies and certain investment firms. The PRA and the FSCS, and the FCA and the FSCS are under a duty pursuant to the Financial Services and Markets Act (FSMA) 2000 as amended, to cooperate with each other, while the BoE is under a similar duty to cooperate and share information with HMT, PRA, and FCA. In particular, the BoE has a statutory duty under the Financial Services Act 2012 to notify HMT immediately when there is a material risk of circumstances arising in which public funds would be put at risk.

• MoUs: Various MoUs among the domestic authorities are in place to promote cooperation. A statutorily required MoU between HMT and the BoE (including the PRA) governs crisis management arrangements, in line with requirements under the Financial Services Act 2012. The crisis management MoU sets out their understanding of their respective responsibilities, lays down procedures for notification and approvals, and modalities for external communication with the Parliament and the public. Under the MoU, the BoE has the primary operational responsibility for financial crisis management while the Chancellor and HMT have the sole responsibility for any decision on whether and how to use public funds. To mitigate moral hazard, the MoU clarifies that the fiscal backstop powers are not anticipated to be used in the majority of crisis situations. Proposed revisions to this MoU¹³ will strengthen cooperation in the resolution planning process and formalize regular high-level engagements between the BoE and the HMT. Other bilateral MoUs exist between the PRA and FCA; the PRA and FSCS; and the FCA and FSCS, clarifying, among others, cooperation and information sharing protocols. There are also bilateral MoUs between the FCA and BoE’s Resolution Directorate (RD), the PRA and RD, and the FSCS and RD to cover arrangements for contingency planning/firm failure. A framework document between FSCS and HMT exists, in addition to a lending/funding protocol.

• Regular Engagements and Crisis Simulations: Bilateral and multilateral discussions occur periodically among the safety net providers. Discussions tend to focus on matters of mutual interest and contingency planning where risks of failure appear to escalate. Regular simulation exercises test the authorities’ well-established framework for coordination during major operational disruption.¹⁴ Targeted exercises are also organized to test coordination in implementing specific crisis intervention measures.

10. Arrangements for information sharing, information analysis and decision-making among the relevant domestic authorities are adequate. The legal framework permits information sharing among the domestic authorities for the purpose of carrying out a public function, but restricts sharing of information that is subject to confidentiality requirements under U.K. or EU law. The BoE is allowed to share information relevant to the financial stability of individual financial institutions or to one or more aspects of the U.K. financial system with HMT or the other regulators (the FCA or the PRA), under section 246 of the BA 2009.

11. The institutional framework ensures a fair amount of operational autonomy. The PRA and the FCA are designed to be operationally independent from Government and the industry in the execution of their regulatory and supervisory mandates. The BoE’s internal governance arrangements ensure that its multiple mandates are executed under distinct governance arrangements (overseen respectively by the MPC, FPC, and the proposed PRC) that enhance operational autonomy in each area. The BoE’s resolution mandate is carried out by its RD currently staffed with some 50 individuals. The FSCS is a stand-alone company limited by guarantee under the oversight of the PRA (and FCA with regards to its non-deposit work) fulfilling the primary operational function in bank failures of protecting insured depositors.

12. The mandates of the individual institutions are inbuilt with appropriate accountability mechanisms. The current framework promotes transparency and accountability to the U.K. Parliament by the domestic authorities involved in resolution and crisis management. Furthermore, there are statutory requirements for the PRA and FCA to submit a report to Parliament (through HMT) where there has been a regulatory failure, while the Chancellor of the Exchequer is under a statutory duty to report to Parliament on the use of the stabilization powers, including the “temporary public ownership” (TPO) stabilization option.

B. Robust Resolution Powers and Tools

14. A broad range of resolution powers and tools are provided for in the legal framework, and reflect international best practices. The BoE is mandated to take official control of a failed institution and to initiate resolution at a fairly early juncture upon the determination by the PRA or the FCA that a regulated institution is failing or likely to fail (Condition 1) and upon the BoE’s determination (and the advice from the PRA or FCA) that it is not reasonably likely that further action will be taken by or in respect of the firm that will result in it no longer failing or being likely to fail (Condition 2). The objectives of resolution are explicitly set out in law, in line with international best practices. In all, the authorities must have regard to seven equally-ranking objectives (including protecting and enhancing financial stability, ensuring the continuity of critical financial services and functions, and protecting public funds) are must balance these objectives according to the circumstances of each resolution case.

15. The BoE is the designated resolution authority in all cases, except where an institution is to be placed under TPO, in which case HMT will conduct the resolution in conjunction with the BoE. The SRR covers banks, building societies, investment firms, mixed financial holding companies/groups, and CCPs. It comprises a stabilization regime which is implemented administratively, as well as a number of court-based modified insolvency procedures namely, the Bank Insolvency Procedure (BIP) the Bank Administration Procedure (BAP), the Building Society Insolvency Procedure, and the Building Society Administration Procedure. In addition to the SRR, a bespoke insolvency procedure called the “Special Administration Regime” (SAR) is available for investment firms holding client assets and a number of hybrid insolvency procedures such as the BIP/SAR and BAP/SAR are available for firms that hold both deposits and client assets.

16. These court-based insolvency procedures are the default resolution tools where the public interest test is not met in a given resolution transaction. These court-based proceedings are initiated by the BoE (or, in certain circumstances, the PRA or FCA) and are based on a modified version of the insolvency law. The BIP involves liquidation of the failed firm and prompt pay out of FSCS-insured deposits, or an FSCS-funded transfer of deposits held by the firm to another institution. The BAP, on the other hand, is used for the administration of residual parts of a failed firm after the use of the partial transfer powers, to ensure that any essential services or facilities continue to be supplied by the residual bank in the BAP to a bridge bank or private sector purchaser. The BAP reverts to an ordinary administration only when this purpose no longer needs to be met. The SAR is used in the case of an investment firm that also holds client assets, with the key objective of returning client money or assets as soon as is reasonably practicable and ensuring continued access to FMIs where necessary. Where a bank in resolution holds client assets, hybrid special insolvency proceedings that combine the BIP or the BAP, together with the SAR¹⁵ may be initiated by the BoE, to ensure protection of depositors as well as clients whose assets are held by the firm.¹⁶ The SAR is currently under review by HMT, with a view to further strengthening it.¹⁷

17. The stabilization regime consists of five stabilization options, one or more of which can be exercised when the “public interest” test is met.¹⁸ These options provide stabilization powers for the BoE to transfer (i) some or all of the business (i.e., the shares or property) of the failed firm to a private sector purchaser; or (ii) to a bridge bank established by the BoE; or (iii) to transfer some or all of the firm’s assets, rights or liabilities or bridge institution to one or more asset management vehicles. The two other stabilization options are the bail-in tool which the U.K. implemented in line with the BRRD, in January 2015, and lastly, TPO. The use of TPO also requires there to be a serious threat to financial stability and is permitted only after shareholders and creditors of the bank have absorbed losses to the minimum extent of the equivalent of 8 percent of the total liabilities (including own funds) of the institution (measured at the point when the action is taken).¹⁹

18. The BoE outlined a proposed approach to exercising the bail-in powers, which has not been tested so far.²⁰ The bail-in power enables the BoE to recapitalize a failed firm through a cancellation, conversion, transfer or write down of claims of equity holders and unsecured creditors,²¹ if alone or together with other stabilization powers, there is a reasonable prospect of return of the firm to viability in accordance with a business reorganization plan. The BoE would prefer to execute the bail-in on the existing firm (“open bank” approach)²² which remains open for business throughout the process. Bail-in is to be executed in a way that ensures that post bail-in, the firm is able to meet regulatory capital requirements and continues to participate in the payment and settlement systems and access market funding and have access to BoE’s liquidity facilities.

19. The BoE is currently preparing extensive internal procedures for bail-in execution. In the run-up to a resolution, the BoE would create a draft resolution instrument to give effect to the bail-in and identify its scope. During the resolution “weekend,” the BoE will confirm which liabilities are bailed-in²³ and will transfer the legal title of the shares to a third-party depository bank which will hold them on trust, until they can be distributed to creditors entitled to compensation. Until the completion of the valuation work and the announcement of the final bail-in terms, the creditors could be issued temporary instruments (“certificates of entitlement”) that could be traded. The resolution administrator will continue to exercise voting rights on behalf of the creditors until a sufficient number of them came forward to claim their shares. Depending on the number of shares issued to an individual bondholder, a formal approval of a change in control may be needed.

20. The U.K. authorities have made progress on establishing a nonbank financial institutions (NBFIs) resolution regime, a key recommendation of the 2011 FSAP. There is a framework for dealing with FMIs that have failed or are likely to fail. The BoE has administrative resolution powers under sections 89B through 89G of the BA, in respect of U.K.-based CCPs, by which it could transfer some or all of the business of the CCP to a private sector purchaser or to a bridge CCP. Anticipated EU proposals in this regard are expected to further strengthen the U.K.’s statutory toolkit in the near future. Other FMIs (e.g., other clearing systems, payment and settlement systems operators and their key service providers) may be subject to a court-based administration procedure under which an administrator is appointed by the court to manage the affairs, business and property of the FMI with the objective of ensuring continuity of its critical functions.²⁴

21. More work is however required on the resolution framework for nonbank financial institutions (NBFIs). In the case of insurance firms, the U.K. has tools for intervening before and after an insurance failure to protect policyholders and ensure an orderly transfer or run-off of the business, however they remain largely untested at least in respect of a systemic insurance firm. The BoE has no bespoke resolution regime for insurance firms in the U.K. including those that may be systemically important. The FMI administration regime has yet to be operationalized pending the adoption of secondary legislation under the Financial Services (Banking Reform) Act 2013.

22. Sufficient safeguards are in place to protect creditors as well as investors, which helps mitigate legal risks from resolution. Among other things, the “public interest” test helps to ensure that individual property rights are not unduly interfered in violation of the European Convention on Human Rights (ECHR). Furthermore, the “no creditor worse off” (NCWO) rule enshrined in the legal framework ensures that investors are not left worse off in resolution than they would have been in insolvency proceedings against the failed institution. Mandatory compensation is required to a claimant who is made worse off, as determined by an independent valuation. In this regard, the creditor hierarchy for payment of claims in insolvency, with a preferential ranking for insured depositors,²⁵ is to be respected also in resolution, with holders of the same class of claims treated equally by virtue of the pari-passu rule enshrined in law. Under the BA and BRRD, the power to depart from the BoE pari-passu rule is explicitly provided only in the context of bail-in, based on well defined exceptional circumstances, although the BoE believes that it is also able to do so in the case of uses of other stabilization powers, subject to the NCWO rule.²⁶

23. The legal framework provides for legal certainty for resolution actions, while resolution officials enjoy legal protection in the execution of their functions. Resolution actions of the BoE or HMT cannot be suspended or overturned by a court of law under judicial review, if such actions are taken in good faith and are not in violation of the relevant provisions of the Banking Act or the ECHR. Where a claim is found to have merit, relief is limited to monetary damages. The BoE, its directors, officers, staff, and resolution (bail-in) administrators appointed by the BoE,²⁷ generally enjoy sufficient legal protection in pursuing the objectives of resolution.

C. Well-Articulated Early Intervention Framework

25. A wide range of early intervention actions can be taken to address supervisory concerns. The FCA and PRA have extensive legal powers²⁸ to take formal remedial actions against banks where a firm infringes, or is likely to infringe in the near future (next twelve months) the requirements of CRR/CRD4. These include, among others: requiring the management to implement measures from recovery plans, changing senior management or board members, and asking for changes to the legal or operational structures of the bank or to the business strategy. While such powers provide legal certainty, moral suasion has worked well in practice and thus formal actions have rarely been required.

26. The authorities should exercise caution with the use of the proposed TM power. Draft legislation proposes to grant the PRA early intervention powers to place a firm under TM in the pre-resolution stage.²⁹ While this regime may work well in cases of persistent conduct-related violations, its potential benefits for remedying deteriorating financial situations are unclear. Given that the firm would remain under the control of its shareholders at this stage, the TM will have no power to override shareholders’ rights of approval of key corporate decisions such as recapitalization, mergers, or sale of assets to help recovery efforts. Also, the possible impact of the power on market confidence should be considered, while possible legal risks should be weighed.

27. Substantial improvements have been introduced to bridge supervisory assessments and enforcement. The Proactive Intervention Framework (PIF) introduced in 2014³⁰ captures the PRA’s judgment about a firm’s risks and its proximity to failure, which is reviewed annually or in response to material developments. Upgrades enforced in January 2016 link the breach of triggers in the various risk areas³¹ to a menu of supervisory measures.³² As firms move to higher PIF stages, senior management is expected to take appropriate remedial actions and the intensity of supervision increases. Firms at heightened risk of failure are subject to closer and more regular scrutiny by the PRA and RD, and discussions with the FSCS will be initiated when relevant.

28. The PIF framework serves as a link between ongoing supervision and resolution³³ (Table 2). Once the RD is notified of a firm’s entry into Stage 3, the engagement with the PRA on contingency planning is intensified and the RD will gather any additional information necessary to carry out resolution, depending on the applicable resolution strategy. An overall PIF score of 5 is likely to trigger an assessment of whether the conditions for resolution are met. The main criteria for assessing Resolution Condition 1 (“institution is failing or likely to fail”) are clearly spelled out in The Bank Recovery and Resolution Order 2014 (item 12)³⁴ and further detailed in PRA guidance, ensuring that such determination supports the entry into resolution before the bank is balance sheet insolvent and when it has no reasonable prospect of return to viability. The PRA’s determination takes into account objective elements³⁵ and expert judgments.

Table 2.

United Kingdom: PRA’s PIF—Bridging Supervision and Resolution

¹ Every firm sits in a particular stage at each point in time.

Table 2.

United Kingdom: PRA’s PIF—Bridging Supervision and Resolution

Stage1	Characterization	PRA Actions	Other entities’ involvement
1	Low risk to viability of firm	Firm subject to normal supervisory risk assessment process and actions	Not applicable
2	Moderate risk to viability of firm	More intense supervisory monitoring	The FSCS evaluates the quality of the data provided to support a single customer view and any obstacles to payout or transfer of deposits
3	Risk to viability absent action by the firm	Impose supervisory actions as needed including based on the RRPs	Regular meetings between PRA and RD are held The PRS and RD will intensify engagements on contingency planning for resolution and will have all means necessary to obtain the information considered necessary to carry out the task
4	Imminent risk to viability of firm	Increase the scale of the recovery actions needed. The PRA will set out a timetable for implementation of recovery actions. PRA may carry out an assessment of Resolution Condition 1, but the possibility of corrective action remains	The RD and FSCS, where relevant, will confirm that all necessary actions to prepare for resolution of the firm have been taken, including that relevant data were readily available
5	Firm in resolution or being actively wound up		RD initiates resolution, where appropriate The FSCS may be required to effect a payout of deposits and/or to fund a deposit transfer or resolution

¹ Every firm sits in a particular stage at each point in time.

View Table

Table 2.

United Kingdom: PRA’s PIF—Bridging Supervision and Resolution

Stage1	Characterization	PRA Actions	Other entities’ involvement
1	Low risk to viability of firm	Firm subject to normal supervisory risk assessment process and actions	Not applicable
2	Moderate risk to viability of firm	More intense supervisory monitoring	The FSCS evaluates the quality of the data provided to support a single customer view and any obstacles to payout or transfer of deposits
3	Risk to viability absent action by the firm	Impose supervisory actions as needed including based on the RRPs	Regular meetings between PRA and RD are held The PRS and RD will intensify engagements on contingency planning for resolution and will have all means necessary to obtain the information considered necessary to carry out the task
4	Imminent risk to viability of firm	Increase the scale of the recovery actions needed. The PRA will set out a timetable for implementation of recovery actions. PRA may carry out an assessment of Resolution Condition 1, but the possibility of corrective action remains	The RD and FSCS, where relevant, will confirm that all necessary actions to prepare for resolution of the firm have been taken, including that relevant data were readily available
5	Firm in resolution or being actively wound up		RD initiates resolution, where appropriate The FSCS may be required to effect a payout of deposits and/or to fund a deposit transfer or resolution

¹ Every firm sits in a particular stage at each point in time.

29. A clear sequence of assessments undertaken by the BoE in close consultation with relevant authorities leads to the decision to implement resolution. The RD evaluates, in consultation with PRA, FCA, and HMT, if it is not reasonably likely that (ignoring stabilization powers) action will be taken by or in respect of the bank that will result in Condition 1 ceasing to be met (Resolution Condition 2). If Condition 1 and Condition 2 are met, the RD will go on to consider whether the exercise of stabilization powers is necessary having regard to the public interest in the advancement of one or more of the resolution objectives (Resolution Condition 3) and whether one or more of the special resolution objectives would not be met to the same extent by winding up the bank (Resolution Condition 4).

A. Clear and Transparent Overarching Policy

32. The BoE has a clear and transparent policy for resolution. A number of policy statements have been issued on either general resolution policies³⁶ or on various operational aspects regarding the exercise of resolution powers.³⁷ Extensive consultations with relevant authorities and the financial industry precede the issuance of the final policies. Although the BoE retains discretion in exercising its resolution powers based on legal and regulatory provisions, the policy statements help achieve clarity in communication and in setting the expectations on the side of firms.

33. At no point of resolution planning can the use of public funds be assumed. The achievement of the resolution objectives appropriately guides the preparedness for and the execution of resolution.³⁸ Among these, the BoE has to protect public funds, including by minimizing reliance on extraordinary public financial support.

As such, resolution planning is conducted on the basis that there is no access to sources of public funding, and that losses are absorbed by shareholders and unsecured creditors of the firm.³⁹ A minimum equivalent of the 8 percent of the total liabilities (including own funds) of the firm in resolution must be exposed to loss before any use of resolution funds, which could be activated only in exceptional circumstances.

34. In the preparedness process, the BoE’s efforts are geared towards achieving resolvability of firms. A firm is deemed to be resolvable if the BoE concludes that it would be feasible and credible to take resolution actions (i.e., use stabilization powers) or insolvency proceedings in respect of the institution while avoiding any significant adverse effect on the financial system, maintaining the continuity of the institution’s critical functions, and without using public funds.

35. The BoE has also defined some broad considerations in its approach to choosing the resolution strategies. The choice of the resolution strategy ultimately emerges from the process of resolution planning, where the BoE and the PRA will carefully consider the individual institution’s RRP based on the characteristics of the firm. In principle, U.K. banks are likely to be resolved by one of three broad strategies: modified insolvency, partial transfer, and whole firm bail-in (Box 1). The first strategy is, broadly speaking, liquidation with prompt insured-depositor payout or transfer, while the last two imply the use of stabilization powers in the public interest.

36. A resolution approach for cross-border firms has also been fleshed out. Similar to resolution strategies applicable to larger firms, the BoE is likely to apply the bail-in strategy for G-SIBs. The Single Point of Entry (SPE) strategy is preferred for firms with integrated legal, operational, and management structures, whereas Multiple Points of Entry (MPE) strategy may be more appropriate for firms that operate across borders through more independently managed and funded legal structures (Box 3). In essence, the SPE would be applied where there are interdependencies between operating companies, but where separation of operating companies is feasible at the resolution “weekend”, then the MPE may be considered. These approaches have been discussed and agreed in crisis management groups (CMGs) which are the platforms for ensuring effective cross-border cooperation.

B. Well-Developed Recovery and Resolution Planning

37. The recovery and resolution process applies to all banks and is geared towards achieving resolvability. There is a clear expectation that “a firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services” (PRA’s Fundamental Rule 8).⁴⁰ All U.K.-incorporated banks, building societies, qualifying parent undertakings⁴¹ and certain investment firms are required to prepare recovery plans annually and to submit “resolution packs” every two years or when material changes occur/when prompted by the PRA or BoE. Branches of foreign G-SIBs would not be typically required to prepare recovery plans.⁴²

38. Detailed expectations, including on governance and oversight guide the RRP process. The overall requirements regarding the scope and content of recovery plans are legally set in the Order No. 2.⁴³ PRA has issued detailed requirements for recovery plans,⁴⁴ which are directly applicable to firms together with the EBA’s regulatory technical standards (RTSs).⁴⁵ [once adopted by the European Commission] and guidelines].⁴⁶ For resolution reporting purposes, PRA has also published comprehensive informational requirements⁴⁷ (“resolution packs”). Responsibility for the firm’s recovery plans (preparation and execution) lies with the Board of Directors or other appropriate senior governance committee or group.⁴⁸ All resolution plans are reviewed and signed-off by BoE’s senior officials and a summary is shared with the firms, together with other relevant issues.

39. The authorities take a proportional approach to the RRPs. Proportionality is reflected at all stages: recovery, resolution, and resolvability. Smaller firms, with straightforward business models are subject to simpler RRPs and may take a more qualitative (or narrative) approach to scenario planning. The larger and more complex firms are subject to elaborated RRPs, based on additional information requested (“Phase 2 packs”) and embedding extensive quantitative analyses and more stringent underlying assumptions. For smaller firms for which the preferred strategy is the bank insolvency procedure, resolvability assessments are likely to be more straightforward than for firms whose preferred strategy involves the use of the BoE’s stabilization powers.

40. There is close cooperation between PRA, FCA, and the BoE to ensure consistency across the RRP process. The PRA sets the range of information requirements for both recovery and resolution planning purposes, although on the latter it cooperates closely with the BoE’s RD. Recovery plans are regularly discussed with the BoE at annual reviews. Resolution plans are prepared by the BoE upon close consultation with the PRA, which helps verify the information provided by the firm and provides firm-specific information based on their expertise and experience. HMT may also be involved as necessary.

41. There is a process for ensuring cross-border cooperation in the RRP process. Where the U.K. firm is part of an EEA group, the PRA assesses the recovery plan along with the other relevant European authorities and seeks to reach a joint decision with them on a group recovery plan. In practice, PRA may share group recovery plans with non-EEA authorities, subject to confidentiality agreements. The BOE coordinates resolution planning for G-SIBs on a cross-border basis through the existing CMGs. In addition, the U.K. authorities are required to cooperate with other EU member states in reaching joint decision on resolution planning (applicable since 2015). Information can be shared with non-EU authorities, but there must be agreement within the resolution college for the resolution plans to be shared.

42. The authorities have improved the RRP process continuously based on the extensive experience accumulated so far. RRPs have been prepared since 2012 and submissions have been adapted to ensure efficiency and relevance of information transmitted by firms. The recovery planning, recently improved through the implementation of the BRRD and related standards, is currently in a phase where the authorities are currently sharing best practices and supervisory expectations. For resolution planning, the information requests made to firms have been adapted once the preferred resolution strategy has been determined, ensuring that subsequent requests for information were proportionate, and better tailored. Most importantly, the intense interaction along this process helped change the mindset of firms and effectively orient actions towards achieving resolvability.

A. Integrated and Far-Reaching Policy Measures

43. The structural reforms will ensure that large banks insulate, operationally and financially, core retail activities. From January 1, 2019, banks with core deposits greater than GBP 25 billion (broadly those from individuals and small businesses) will be required to ring-fence their core retail activities into separate ring-fenced bodies (RFBs).⁴⁹ In essence, the RFB will have a restricted scope of business activities and will be reasonably insulated⁵⁰ from shocks originating in other parts of the group or the global financial system. The PRA has published near final rules on governance, legal structure and continuity of services and facilities and recently consulted on the approach to ring-fencing transfer schemes, prudential requirements, intragroup arrangements and the use of FMIs.

44. Parallel proposals have been made for ensuring operational continuity in resolution. The PRA’s draft rules⁵¹ seek to ensure that firms structure their operational arrangements in a way that allows critical shared services to continue to be available before, during and after resolution. Three structures have been proposed as potentially effective: a dedicated intragroup service company providing critical shared services to one or more entities; an operational division providing critical shared services from within a regulated entity with attributes that would allow the BoE to implement a separate service company model should they need to; and a hybrid model. The firms will be expected to comply from January 1, 2019.

45. Efforts have also been made to improve the capability of the FSCS to process depositor information quickly. Deposit-taking firms have been required since 2010 to hold their FSCS-eligible customer data in a single customer view (SCV) file. Firms have 72 hours to produce an SCV file, upon request from the PRA or FSCS, and this timeline will be shortened to 24 hours from December 1, 2016. These changes effectively enable the FSCS to verify SCV files and make the subsequent payment of claims or support the deposit transfers more quickly.

46. Finally, both BoE and PRA have legal powers to require individual firms or classes of institutions to take measures for removing obstacles to resolvability. The BoE is required to undertake annual resolvability assessments⁵² for all banks and has extensive directive powers to require changes in the legal and operational structures of a firm if that is necessary to ensure continuity of critical functions in resolution.⁵³ The PRA is also mandated to assess resolvability of firms as part of their annual supervisory assessments⁵⁴ and is legally empowered to require firms to to take action, including restructuring, to improve the feasibility of orderly resolution.

47. The risk of misalignment in the use of the PRA and BoE resolvability powers is minimized through an extensive consultation process. When the PRA identifies obstacles to resolvability, it provides its findings to the BoE, which is responsible for undertaking the formal resolvability assessment and communicating the measures required to be taken by firms to address obstacles to resolvability. The BoE must consult the PRA or the FCA (in the case of an FCA solo-regulated firm) and, where appropriate, the FPC before requiring the institution to take specified measures to address or remove impediments to resolvability. Where there are common impediments affecting a range of institutions, the PRA could require the impediments to be addressed through rules of general application made pursuant to its statutory rule-making powers, or the BoE could give a direction with general effect or with respect to a particular class of institutions.

B. Bringing MREL to Life

48. To facilitate the implementation of stabilization powers, all U.K. banks are subject to a MREL. The MREL has been introduced by the BRRD and will be set by the BoE (in close coordination with the PRA or FCA) for all banks, regardless of size, at both individual and group consolidated basis.⁵⁵ The MREL will be tailored to the risk profile and resolvability of individual institutions and enforced through BoE’s powers of direction. The four U.K. G-SIBs will be also subject to MREL, which will reflect their characteristics and resolvability, and will be set so as to implement the TLAC⁵⁶ requirements.

49. The MREL and TLAC are conceptually similar, but the MREL’s operational features are more flexible, given its broader scope. Both MREL and TLAC aim at ensuring that a sufficient loss absorbency cushion is available within institutions, should the need arise, to support their orderly resolution without recourse to public funds. To ensure credibility and feasibility, both MREL and TLAC instruments have to be legally enforceable for the purpose of loss absorption and should not give rise to systemic risk. Eligibility for MREL is broadly aligned to the TLAC, although the MREL embeds more flexibility, which reflects its broader scope of application (Table 3). The expected macroeconomic benefits of MREL will exceed costs.⁵⁷

Table 3.

United Kingdom: Comparison Between FSB TLAC and BRRD MREL Proposals

Table 3.

United Kingdom: Comparison Between FSB TLAC and BRRD MREL Proposals

	FSB TLAC	EU BRRD / MREL (EBA Guidelines)
Scope	Applicable to G-SIBs	Applicable to all European banks
Quantum	Common minimum: 16-18 percent RWA and 6-6.75 percent of leverage ratio denominator + Additional firm-specific (bank-by-bank): considering risk profile and resolvability Basel III capital buffers to be met on top of the TLAC requirements	No common minimum requirement, but: - G-SIBs will be subjected to the FSB TLAC requirements - Firm specific MREL requirements will be set as a percentage of own funds and total liabilities, based on firm risk profile, resolvability etc. Treatment of capital buffers not specified
Eligible instruments	“Legal enforceability” Capital and debt liabilities (paid in, unsecured, residual maturity longer than a year)	“Legal feasibility” Own funds and eligible liabilities (fully paid up, unsecured, remaining maturity of at least one year)
Exclusions	Insured deposits Liabilities from derivatives, structured notes, preferred liabilities, or otherwise excluded from bail-in	Insured and other preferred deposits Liabilities arising from derivatives
Subordination	Requirement for subordination (contractual, structural, or statutory) to operational liabilities on which the performance of critical functions depend	No explicit subordination requirement
Implementation	January 1, 2019 (16 percent RWA and 6 percent leverage ratio denominator), January 1, 2022 (18 percent RWA and 6 percent leverage ratio denominator)	January 1, 2016, but authorities can make use of a transition period and set MREL requirements starting in 2020

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Table 3.

United Kingdom: Comparison Between FSB TLAC and BRRD MREL Proposals

	FSB TLAC	EU BRRD / MREL (EBA Guidelines)
Scope	Applicable to G-SIBs	Applicable to all European banks
Quantum	Common minimum: 16-18 percent RWA and 6-6.75 percent of leverage ratio denominator + Additional firm-specific (bank-by-bank): considering risk profile and resolvability Basel III capital buffers to be met on top of the TLAC requirements	No common minimum requirement, but: - G-SIBs will be subjected to the FSB TLAC requirements - Firm specific MREL requirements will be set as a percentage of own funds and total liabilities, based on firm risk profile, resolvability etc. Treatment of capital buffers not specified
Eligible instruments	“Legal enforceability” Capital and debt liabilities (paid in, unsecured, residual maturity longer than a year)	“Legal feasibility” Own funds and eligible liabilities (fully paid up, unsecured, remaining maturity of at least one year)
Exclusions	Insured deposits Liabilities from derivatives, structured notes, preferred liabilities, or otherwise excluded from bail-in	Insured and other preferred deposits Liabilities arising from derivatives
Subordination	Requirement for subordination (contractual, structural, or statutory) to operational liabilities on which the performance of critical functions depend	No explicit subordination requirement
Implementation	January 1, 2019 (16 percent RWA and 6 percent leverage ratio denominator), January 1, 2022 (18 percent RWA and 6 percent leverage ratio denominator)	January 1, 2016, but authorities can make use of a transition period and set MREL requirements starting in 2020

50. The MREL will be aligned with the proposed resolution strategy of the firm (Table 4). The BoE has a degree of discretion in establishing the individual firm’s MREL quantity and quality.⁵⁸ The firm-specific MREL will be established as a sum of two components: a loss absorption amount (the amount needed to absorb losses in resolution) and a recapitalization amount reflecting the preferred resolution strategy (the amount needed to recapitalize the firm in resolution as necessary to meet the resolution objectives).⁵⁹ The PRA also expects firms not to double count common equity tier 1 (CET1) capital towards, on the one hand, MREL, and, on the other hand capital buffers (Basel III/CRD IV combined buffers and Pillar 2 buffers) or leverage ratio buffers.⁶⁰

Table 4.

United Kingdom: Proposed Indicative Parameters for MREL Application

Source: The BoE’s approach to setting MREL, December 2015.

Table 4.

United Kingdom: Proposed Indicative Parameters for MREL Application

Scope	Indicative resolution strategy	Indicative MREL	Subordination
Institutions with fewer than 40,000 “transactional accounts”	Modified insolvency	No greater than minimum capital requirements (i.e., greater of own funds requirements, applicable leverage ratio, and Basel I floor)	Not applicable
Institutions with more than 40,000 “transactional accounts” and balance sheet less than GBP 15–25 billion	Partial transfer (P&A, bridge)	Equal to current minimum capital requirements plus a proportion of the minimum capital requirements corresponding to the balance sheet transferred	Generally no subordination requirement (senior operating liabilities will be left behind in insolvency, along with the MREL resources, thus avoiding the need to depart from pari passu treatment)
Institutions with balance sheet greater than GBP 15–25 billion (including G-SIBs)	Bail-in	Equal to two times current minimum capital requirements minus any changes to post-resolution capital requirements. Level necessary to support group resolution strategy	Subordinated to senior operating liabilities
Subsidiaries of foreign institutions for which the home authority is to lead an SPE resolution	These subsidiaries are not subject to U.K. resolution, but resolved as part of the SPE resolution	Subject to internal MREL as necessary to support the group resolution strategy	Subordinated to senior operating liabilities

Source: The BoE’s approach to setting MREL, December 2015.

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Table 4.

United Kingdom: Proposed Indicative Parameters for MREL Application

Scope	Indicative resolution strategy	Indicative MREL	Subordination
Institutions with fewer than 40,000 “transactional accounts”	Modified insolvency	No greater than minimum capital requirements (i.e., greater of own funds requirements, applicable leverage ratio, and Basel I floor)	Not applicable
Institutions with more than 40,000 “transactional accounts” and balance sheet less than GBP 15–25 billion	Partial transfer (P&A, bridge)	Equal to current minimum capital requirements plus a proportion of the minimum capital requirements corresponding to the balance sheet transferred	Generally no subordination requirement (senior operating liabilities will be left behind in insolvency, along with the MREL resources, thus avoiding the need to depart from pari passu treatment)
Institutions with balance sheet greater than GBP 15–25 billion (including G-SIBs)	Bail-in	Equal to two times current minimum capital requirements minus any changes to post-resolution capital requirements. Level necessary to support group resolution strategy	Subordinated to senior operating liabilities
Subsidiaries of foreign institutions for which the home authority is to lead an SPE resolution	These subsidiaries are not subject to U.K. resolution, but resolved as part of the SPE resolution	Subject to internal MREL as necessary to support the group resolution strategy	Subordinated to senior operating liabilities

Source: The BoE’s approach to setting MREL, December 2015.

51. The authorities envisage a phased in implementation of MREL. The BoE proposes to make use of the transition period allowed under the BRRD and implement MREL from 2016 to 2019 for G-SIBs or 2020 for other firms. Preliminary expectations on the MREL requirements will be communicated to firms by end 2016. Until 2020, the MREL is set in an amount equal to the applicable individual firm’s capital requirements (i.e., not operationally binding), although the BoE retains discretion to set additional MREL requirements on firms where action is needed to enhance resolvability.

52. U.K. G-SIBs will be required to meet the minimum MREL/TLAC requirement on a consolidated basis by January 2019. By then, the U.K. G-SIBs are required to achieve the minimum consolidated TLAC of 16 percent of risk-weighted assets (RWAs) or 6 percent of leverage exposures (the common minimum TLAC). BoE will require that TLAC be structurally subordinated through external debt issuance by the holding company⁶¹ and proceeds be down-streamed to key operating subsidiaries as equity, other regulatory capital instrument, or loans that are subordinated (statutory or contractual) to senior liabilities of those subsidiaries. The U.K. authorities have started cooperating closely with relevant foreign authorities regarding the implementation of the MREL/TLAC within CMGs.

53. The MREL framework goes a long way in supporting resolvability of banks, but its implementation will be challenging. The BoE estimates⁶² that the U.K. banks’ MREL long-term debt restructuring need is around GBP 223 billion, while the estimated net shortfall is relatively small—at GBP 27 billion. While U.K. G-SIBs have a relatively small net shortfall of overall MREL/TLAC, efforts will be needed to make sure that the internal MREL/TLAC is positioned appropriately within the groups. Clearing the legal and operational hurdles for effectively implementing the MREL/TLAC framework in a cross-border context will be a complicated process. Many firms with a domestic profile will need to adjust their funding strategies and to issue additional MREL-eligible debt.

54. The FCA has taken proactive measures to protect retail customers from investing in certain riskier and less transparent debt instruments. Specific measures have been taken in regard to contingent convertible capital instruments (CoCos), given risks that such loss-absorbing instruments may pose to retail customers that are neither sophisticated nor high net worth. The FCA has introduced product intervention rules restricting the retail distribution of CoCos.⁶³

A. Legal Framework for Cross-Border Cooperation

59. The U.K. authorities have taken a participatory and cooperative approach in developing effective cross-border arrangements. As both a home and host authority, the United Kingdom has an incentive to ensure that both interests are treated equitably in resolution. As a home authority, the BoE is committed to leading a cross-border resolution with the objective of ensuring that financial stability is maintained in both home and host jurisdictions.⁶⁶ where the United Kingdom is a host to a foreign firm that needs to be resolved, the U.K. authorities aim to coordinate closely with the home authorities and only seek to take independent action in exceptional cases, in line with the approach for cross-border cooperation set out in the KAs.

60. The legal framework helps to promote cross-border resolution, although it remains untested. The BoE, as resolution authority, is authorized to enter into cooperation arrangements with foreign authorities. To this end, a number of MoUs have been signed with counterparts in foreign jurisdictions. Legal gateways for information sharing with foreign authorities (EU and non-EU) are broad, where information is required by foreign authorities for the carrying out of a public function. In the case of non-EU authorities, the BoE is however required to assure itself that such information would be held under the same standards of confidentially to which the U.K. domestic authorities are subject. This sometimes involves BoE “equivalence assessments” in respect of the confidentiality regimes of the foreign authority.

61. Resolving a cross-border bank could involve a number of legal and practical challenges for the U.K. authorities. Cooperation could be hampered by significant variations in resolution regimes (particularly for jurisdictions which have not fully adopted the KAs), as well as differences in approaches to resolution, valuations, and creditor hierarchies, to mention a few. The incorporation of the BRRD treatment into the U.K.’s legal framework may result in discrimination in favor of U.K., EU, or EEA interests, at the expense of third-countries and their creditors. The U.K.’s creditor hierarchy for insolvency and stabilization options post-BRRD reflects a less favorable treatment for deposits held through non-EAA branches of U.K. banks. This may affect cooperation of third countries where the U.K. undertakes resolution of cross-border banks, in cases where an operating company in the U.K. with branches in a third-country may need to be resolved by the U.K. authorities. In such cases, the third country may find the need to ring-fence local assets held by the branch in their jurisdiction to protect domestic deposits, instead of transferring them to the U.K. in support of the U.K.’s resolution actions. Similarly, differences in domestic resolution frameworks in relevant jurisdictions may impede cross-border resolution efforts.

62. The U.K. authorities are determined to implement resolution in the cross-border context in a manner that does not discriminate against third country depositors and hence avoids the above risks. The BoE’s preferred resolution strategy for major cross-border U.K. banks would only involve the application of resolution tools to the holding company, whose creditors would be treated equitably regardless of the location of their claim or their nationality. Under this strategy, the key operating companies, where deposit-taking takes place, would not enter resolution, so depositors at their non-EEA branches would not be discriminated against compared with depositors of the U.K., EU, or other EEA branches.

63. Recognition and enforcement of cross-border resolution actions is critical to ensuring effectiveness of the resolution regime. The BRRD and the EU Credit Institutions Reorganization and Winding-up Directive provide a clear framework for cooperation and coordination among EU member states, reflecting among other things, responsibilities of home jurisdictions for resolving EU banks, and for mutual recognition of resolution actions undertaken by the home authorities. The U.K. legal framework also empowers the BoE to recognize (with the approval of HMT) third-country resolution actions in respect of a third-country institution operating in the U.K., except in limited circumstances including where the stability of the U.K.’s financial system is at risk, or where U.K. public funds are implicated.⁶⁷ Recognition by the BoE of third country resolution actions gives effect to such actions with the same effect as it would have under the third country’s legal framework, although BoE could also exercise its stabilization powers in respect of a U.K.-based branch or entity, in support of such third-country actions. There are however plans underway to empower the BoE to initiate independent resolution action against U.K. branches of third-country banks where a third country resolution action is not recognized for reasons specified in the BA.⁶⁸

64. Recognition of U.K. resolution actions outside the EU could be a challenge and potentially, a major impediment to orderly resolution of a G-SIB. Unlike the U.K., several jurisdictions where U.K. banks have operations or hold assets and liabilities do not have statutory provisions for recognizing and giving effect to foreign resolution actions, resulting in the need for parallel resolution actions or the risk of ring-fencing of U.K. banks’ assets in those jurisdictions. This may impede the effectiveness of U.K. resolution powers (such as the power to stay termination rights of counterparties) and resolution tools such as bail-in and transfers. Execution risks are partly mitigated by the build-up of sufficient loss absorbency capacity in the form of enforceable MREL/TLAC that would enable the application of the bail-in or partial transfer at the level of the holding company.

65. The U.K. has sought to minimize this risk by pursuing contractual approaches to recognition of its resolution actions. The U.K. authorities support the ISDA Resolution Protocol, to which U.K. G-SIBs are signatories. U.K. legislation also requires U.K. banks to provide for contractual bail-in recognition clauses in contracts governed by foreign law, in line with Article 55 of the BRRD, while proposed rules will require contractual recognition of temporary stays of terminations rights in resolution.⁶⁹ Implementation of the contractual bail-in requirement in the U.K. has however been challenging due to concerns raised by foreign authorities with respect to the implications of the requirement for their jurisdictions and by firms concerned about the wide scope of Article 55. The PRA has proposed to modify this rule to clarify the scope of covered liabilities⁷⁰ and is consulting on a disapplication of the rule to certain liabilities on the basis of impracticability. The limitations of the contractual recognition approach are clear, and in any event, the scope of the Article 55 requirement relates only to bail-in and not to other resolution tools such as transfers. Ultimately statutory recognition by foreign (third country) authorities of U.K. resolution actions would be useful, in order to make cross-border resolution effective.

B. Making Cross-Border Cooperation Work

67. The operational features of the cross-border cooperation in resolution are shaped up by the EU framework and of the United Kingdom’s adherence to the FSB agenda. As an EU member, the United Kingdom is required to implement cross-border arrangements for cooperation resulting from the implementation of the BRRD, including by establishing or participating in EU resolution colleges. The United Kingdom is not part of the EU Banking Union and, as such, does not participate in the Single Resolution Mechanism. At the same time, the United Kingdom has already accumulated a lot of experience in implementing the international framework for cooperation related to G-SIBs. CMGs for the U.K. G-SIBs have been established since 2013 and have become an essential forum for cross-border coordination in the area of resolution planning.

68. The United Kingdom has been a frontrunner in implementing the FSB agenda on cross-border cooperation. For all the U.K. G-SIBs, the RRPs have been shared and discussed within the CMGs and a first round of resolvability assessments has been completed in 2015 (Figure 1). As a result, operational resolution plans are in the course of being updated. Cooperation Agreements (CoAgs) have been discussed within CMGs for all U.K. G-SIBs, two have been approved, and two are to be signed soon. The U.K. authorities are recognized by their main foreign counterparts for their open and constructive engagement and thought leadership in both bilateral and multilateral relationships (including in FSB and EU fora).

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United Kingdom: Authorities’ Resolution Planning Status for G-SIBs

Citation: IMF Staff Country Reports 2016, 155; 10.5089/9781484393338.002.A001

Source: FSB and UK authorities

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69. A number of practical measures are currently being taken to support operationalizing cross-border resolution planning. The CoAgs are an important (nonbinding) basis for outlining the broad roles and responsibilities of the CMG members and establish a shared understanding of resolution procedures. The authorities have found it useful to start developing complementary bilateral resolution playbooks, embedding a greater level of detail with regard to implementation of specific resolution work streams (i.e., bail-in mechanics, communication, valuations, etc.) that need to be undertaken in coordination with other counterparts.

70. The U.K. and U.S. authorities have engaged closely in developing common approaches to the resolution of G-SIFIs. A joint FDIC-BoE paper published in 2012⁷¹ outlined the authorities’ common considerations on implementing resolution actions under an SPE strategy, including on the need to ensure sufficient loss absorbency at the top of the group. Outside the CMG process, the U.K. and U.S. authorities have also worked together to develop a common understanding of how the two jurisdictions might interact during a resolution. Such interactions are planned with other jurisdictions.

71. Other operational impediments to resolvability will need to be addressed in a cross-border context. The effective implementation of the MREL/TLAC standard across relevant resolution entities will require support of other relevant jurisdictions to pre-position the internal MREL/TLAC across the group and will have to be accompanied by supportive legal, contractual, and operational arrangements. Other measures will need to be taken to ensure the supply of services from within the group that support critical economic functions, as well as for ensuring flexibility and coordination in the firms’ systems so that the authorities can rapidly value the firm in resolution. Many of these are work in progress in the international fora.

72. The EU resolution colleges are only at inception given the relative recent entry into force of the relevant BRRD provisions. Membership⁷² in the resolution colleges is restricted to EU Member States, while other countries can only be invited as nonvoting observers. Group level resolution authorities chair the resolution colleges. Resolution colleges are expected to become fully operational in 2016. In 2015, the BoE has set up resolution colleges for three of the largest banking groups, and is in the process of reviewing whether there are any additional colleges which need to be established in 2016. The authorities expect to be invited to participate in a number of resolution colleges as a host country and participation will be prioritized depending on the importance of the firm for the U.K.

73. Unlike CMGs, resolution colleges impose legally binding procedural and decision making requirements on members in key areas. Members of the resolution colleges have to take join decisions on the resolution plan, resolvability assessment, setting the MREL, and measures to remove obstacles to resolvability. The EBA has binding mediating powers in regard to disagreements within colleges in the event that one of the members refers the matter to the EBA. The cooperation framework for EU colleges is expected to evolve further pending the adoption of the EBA binding standards in 2016, which will draw on the general principles outlined in the BRRD. For colleges with significant involvement of countries participating in the Banking Union, the participation of the Single Resolution Board is expected to help streamline coordination.

74. The EU resolution colleges are closely coordinated with the CMGs for the U.K. G-SIBs. Given the importance of non-EU global operations of U.K. banks, the U.K. took an inclusive approach and invited already the non-EU CMG members to participate as observers in the relevant resolution colleges. The CMGs are expected to remain the main vehicle for communication across the groups and to coordinate closely with the resolution colleges. Given the early stages of the resolution colleges, their members will be likely benefit from the substantial experience already accumulated in the CMGs.

75. The U.K. authorities have been forthcoming in cooperating with non-CMG countries where the G-SIBs operate. Participation in CMGs on a global basis is subject to materiality of the local operations to the whole group. Many U.K. G-SIBs have widespread global presence,⁷³ and as such, there is a large number of host countries which are not involved in CMGs. Some of these are hosts of U.K. banks which have a systemic importance in the context of the host financial sectors. With some of these host countries, lines of communication have been opened, upon request, to the extent that they had appropriate legal frameworks to protect the information received. In some cases, the U.K. authorities built awareness on cross-border issues in the context of regional sub-groups.

A. Preparing an Operational Framework for Funding of Firms in Resolution

77. The BoE, as a resolution authority, may need to mobilize temporary sources of funding (resolution funding) to enable the orderly resolution of a firm. As part of the resolution planning and resolvability assessments, the BoE requires firms to build sufficient MREL to restore the solvency of the failing firm (or its successor). The solvency shortfall that might arise at the point of resolution is inherently subject to a certain degree of uncertainty given hard to anticipate market or economic conditions at the time of the entry into resolution.⁷⁵ In addition, restoring the solvency may not be sufficient to ensure the continuity of a firm’s critical functions if the firm does not have adequate liquidity. In line with the KAs, temporary sources of funding may need to be mobilized to maintain essential functions and to enable the orderly resolution.

78. The BRRD implementation has introduced new conditions for the provision of funding of firms in resolution. At present, the U.K. has three funding mechanisms that could be used to ensure the continuity of a firm’s critical functions if the internal resources of the firm in resolution (i.e., MREL or liquidity) are not sufficient. First, the FSCS could contribute its funds where resolution actions aim at ensuring depositors’ access. Second, the BRRD introduced the possibility for the BoE to request the HMT to release the resolution fund (in an amount up to 1 percent of the deposits protected by the FSCS) to support a variety of resolution actions. Third, the BoE’s regular and exceptional liquidity insurance frameworks could be deployed, more generally, for solvent banks in resolution experiencing temporary liquidity pressures. These options are subject to specific conditions and limitations, as outlined below.

B. Strengthening Deposit Insurance

89. The FSCS protects eligible depositors in all authorized deposit-takers in the U.K. The FSCS is the U.K. deposit insurance scheme, although its functions are broader (i.e., compensation fund of last resort for customers of all authorized financial services firms). FSCS carries out “pay-box plus” functions (insured deposits’ repayment or transfer plus contributions towards cost of resolution under strict conditions). The PRA is the authority providing governance and oversight of the FSCS. The PRA and the FCA appoint the members of the FSCS’s Board of Directors while the HMT approves the appointment (and removal) of the Chairman and its CEO, who is also an accounting officer.

90. The FSCS has a hybrid model of financing, with a large ex-post component. The levies raised annually⁸⁵ from the industry are set within forecasted repayments⁸⁶ and other expenses for the year and are subject to an overall current limit of GBP 1.5 billion to the deposit taker class.⁸⁷ As such, the FSCS is able to meet promptly the repayment needs corresponding to failures of small institutions, as demonstrated in the post-crisis failures of small credit unions. Nevertheless, the funds of the FSCS would not be sufficient, for example, in the event of an unexpected failure of a medium-sized bank. In such cases, the PRA has to decide whether additional ex-post levies can be accessed from the industry or if backstops (commercial or public) have to be accessed. The FSCS has access to a commercial revolving credit facility (of GBP 750million-GBP 1.5 billion) to meet a prompt payout deadline. In order to repay that annual facility, the PRA decides whether additional ex-post levies can be raised or whether access is needed to funds raised by the Bank Levy, by borrowing from the National Loan Fund (NLF) or other HMT funds as appropriate.⁸⁸ During the crisis, the FSCS model of financing proved to be highly procyclical as the fund had to borrow substantially from the government at a time when pressures on public finances emerged from different parts of the economy.⁸⁹ It may take another decade to the FSCS to amortize its large outstanding obligation to HMT.

91. Given the institutional construct and its narrow “pay-box plus” mandate, the FSCS has relatively limited operational independence. Rules and regulations are exclusively set by the PRA or the FCA and the FSCS annual management expenses limit is set by the PRA and the FCA. In setting the rules for the FSCS, the PRA and FCA must act within their statutory duties and objectives, including financial stability. The PRA must also ensure that depositors are appropriately protected. The FSCS’s accounts are consolidated within HMT Group Accounts and in discharging its functions the scheme manager must have regard to the need to ensure efficiency and effectiveness.⁹⁰ The directors of the FSCS are appointed on terms to secure their independence.

92. The transposition of the EU Deposit Guarantee Scheme Directive (DGSD) brought some important changes in the deposit insurance system. The FSCS’s⁹¹ coverage extends now to large corporates; in addition to previously covered individual depositors and small and medium enterprises (no netting is allowed). From 1 January 2016, the deposit limit for bank accounts has been reset to GBP 75,000 per person per firm, lower than the previous GBP 85,000 level (equivalent to the uniform EU protection limit of €100,000). The authorities took adequate measures to ensure a smooth transition to the lower coverage. Previous measures taken to improve the capacity of producing the SCV file already enable the FSCS to make quick depositor repayments, well within the seven days maximum mandated by the DGSD. Finally, the FSCS has to reach a target level of ex-ante financing of 0.8 percent of the amount of covered deposits.⁹²

93. The requirements of the DGSD for ex-ante financing of DISs⁹³ are proposed to be met through bank levy contributions. New EU-wide policy⁹⁴ asks, in line with the international standards, that funding of DGSs be provided on an ex-ante basis and reach a target level of 0.8 percent of the amount of covered deposits by mid-2024. The U.K. will meet this requirement by allowing the FSCS to access, when needed, and when PRA determines that the FSCS is not to raise an ex-post levy, a notional fund equivalent to the relevant target level from HMT. The existing lending protocol between the FSCS and HMT is in the process of being updated to this effect.⁹⁵