RRD: Handbook rules

As the prudential regulator of IFPRU 730k investment firms, the FCA has made new Handbook rules to implement the Recovery and Resolution Directive (RRD). Most of these new rules came into force on 19 January 2015. The rest come into force on 1 January 2016. 

Our rules implementing the RRD have been inserted into the FCA Handbook. The vast majority of the new rules have been added to the Prudential Sourcebook for Investment Firms (IFPRU) in chapter 11 ‘Recovery and resolution’. Some of the rules regarding the submission of recovery plans and information for resolution plans have been included in the Supervision manual (SUP). It was also necessary to add a number of new definitions to the glossary of definitions contained in our Handbook.

We did not need to implement all aspects of the RRD. This was because many of the aspects fall within the remit of the Bank of England as the designated resolution authority.

The rules made to implement the RRD address 6 key topics. 

Application of our rules

Our rules on recovery and resolution affect:

  • investment firms that we regulate prudentially and that meet the definition in our Handbook of an IFPRU 730k firm
  • entities in a group that contains an IFPRU 730k investment firm or credit institution; this includes qualified parent undertakings (QPUs) and mixed activity holding companies

IFPRU 11 does not apply to:

  • PRA authorised persons
  • QPUs that are within the scope of the PRA’s rules on recovery and resolution
  • EEA firms carrying on a regulated activity in the UK
  • firms from third countries

We have included in IFPRU 11.1.6G guidance on the application of the provisions and the definitions contained therein. A table in IFPRU 11.1.7G summarises which sections of IFPRU 11 apply to which types of firms and QPUs.

Recovery plans

Each IFPRU 730k firm that is not subject to supervision on a consolidated basis must draw up a recovery plan and submit this plan to the FCA. Our rules on the content of recovery plans can be found in IFPRU 11.2. Certain other group entities, including qualified parent undertakings (QPUs), must draw up a group recovery plan and submit it to the FCA. IFPRU 11.3 contains our rules on group recovery plans.

What recovery plans must contain

The requirements regarding the content of recovery plans are different depending on whether the firm or other group entity is subject to the full obligations of the RRD or to simplified obligations.

The following are subject to the full obligations:

  • significant IFPRU 730k firms
  • entities in an RRD group that includes an IFPRU 730k firm that is a significant IFPRU firm
  • entities in an RRD group that does not contain an IFPRU 730k firm

The following are subject to simplified obligations:

  • non-significant IFPRU 730k firms
  • entities in an RRD group that includes a non-significant 730k IFPRU firm, and does not include a significant IFPRU 730k firm or a credit institution

Recovery plans of significant IFPRU firms (and entities in a group subject to the full obligations) must include the information set out in IFPRU 11 Annex 1R.

Non-significant IFPRU firms (and entities in a group subject to simplified obligations) are permitted to submit simplified recovery plans. The elements that must be included in simplified plans are set out in: 

  • IFPRU 11.2.7R for firms’ recovery plans
  • IFPRU 11.3.9R for group recovery plans

Non-significant IFPRU firms (and entities in a group subject to simplified obligations) must also include any further information that is material to the business.

All recovery plans and group recovery plans must include indicators that identify when the firm or group may take the appropriate actions referred to in the plan. Regard should also be had to the EBA Guidelines on the minimum list of qualitative and quantitative recovery plan indicators.

Submitting a recovery plan 

The date on which the first recovery plan must be submitted is dependent on the type of firm or group entity and its total balance sheet assets. Recovery plans must be submitted to us within 3 months of the reporting reference dates shown in SUP 16.20.2R.

After this, updated plans must be submitted either yearly or every 2 years. A recovery plan must be updated if it could be affected materially by changes to the structure, business or financial situation of the firm or group entity concerned.

An overview of all first and ongoing reporting dates can be found in the table below:

 

Type of firm or group entity

Total balance sheet assets

First reporting reference date

Ongoing reporting reference date

significant IFPRU firm

or

firm or QPU in an RRD group subject to the full obligations

more than £2.5 billion

30 June 2015

Every year on the same date as the first reporting reference date.

more than £1 billion and less than £2.5 billion

30 September 2015

more than £500 million and less than £1 billion

31 December 2015

less than £500 million

31 March 2016

non-significant IFPRU firm

or

firm or QPU in an RRD group subject to simplified obligations

more than £50 million and less than £500 million

30 September 2015

Every two years on the same date as the first reporting reference date.

more than £15 million and less than £50 million

31 December 2015

more than £5 million and less than £15 million

31 March 2016

less than £5 million

30 June 2016

Resolution plans

While it is the firms and group entities themselves that draw up recovery plans, resolution plans are drafted by the resolution authority. In the UK, the resolution authority is the Bank of England (the Bank). IFPRU 730k firms that are not subject to supervision on a consolidated basis and certain group entities that are within the scope of IFPRU 11 are required to provide certain information to the Bank in order that it can draw up a resolution plan. The FCA has agreed to collect baseline information from firms on behalf of the Bank and this is reflected in the rules.

Information that must be provided

IFPRU 11.4 contains our rules on the baseline information that firms and group entities must provide to us. The information required is described in detail in IFPRU 11 Annex 2R. It is split into 2 parts:

Part A requires information on the corporate structure and material legal entities. This covers:

  • group structure and use of branches/subsidiaries
  • business model
  • capital and funding
  • activities and operations

Part B requires information on economic functions and covers:

  • capital markets and investment
  • wholesale funding markets
  • payments, clearing, custody and settlement

When the information must be provided

The question of when firms and group entities are required to provide resolution information is addressed in SUP 16.20.4R.

The information must be sent to us for the first time within 3 months of the reporting reference dates specified.

After this, the information must be submitted every 2 or 3 years as detailed in the table below. A firm must notify the FCA if its resolution plan information could be materially affected by changes to the structure, business or financial situation of the firm or group entity concerned.

Type of firm or group entity

First reporting reference date

Ongoing reporting reference date

significant IFPRU firm

or

firm or QPU in a group subject to the full obligations

30 June 2015

Every two years on the same date as the first reporting reference date.

non-significant IFPRU firm

or

firm or QPU in a group subject to simplified obligations

31 December 2015

Every three years on the same date as the first reporting reference date.

Following an assessment of the baseline information by the Bank, supplementary information may be requested from individual firms and group entities if the Bank considers further information is necessary to inform the development of resolution strategies. The FCA and/or the Bank will provide more information on the collection and nature of the supplementary information in due course.

Furthermore, as an individual firm approaches resolution, the Bank may request further information to facilitate resolution contingency planning or to update information provided previously.

Intra-group financial support

The RRD provides that group entities must be permitted to enter into financial support agreements with other entities in the group. This allows them to provide financial support to any other party to the agreement should the need arise.

IFPRU 11.5 contains the requirements, conditions and procedures to be followed. In line with the RRD, our rules and guidance cover:

  • the application to and approval by the consolidating supervisor of intra-group financial support (IGFS) agreements
  • the elements that IGFS agreements must contain and the principles with which they must comply
  • the conditions which must be met before IGFS can be given
  • the decisions of the management bodies of the relevant entities to give and receive IGFS
  • the obligation to notify the relevant authorities of the intention to give IGFS

IFPRU 11.5.22R sets out the requirement on all relevant group entities to make public whether or not they have entered into an IGFS agreement. Where such an agreement is in place, the terms of and parties to the agreement must be publicly disclosed.

Contractual recognition of bail-in

In line with the RRD, IFPRU 11.6 requires IFPRU 730k firms and some group entities to include a certain term in their contracts that govern some types of liabilities. The term must state that the creditor or other party to the agreement creating the liability:

  • to be bound by the actions of the resolution authority (i.e. the Bank of England) in relation to that liability
  • This applies to liabilities that are issued or entered into after 1 January 2016 and that are governed by the law of a country outside of the EEA. It does not apply to liabilities that cannot be bailed in under the RRD or to certain types of deposits of individuals and SMEs

Our rules on the contractual recognition of bail-in entered into force on 1 January 2016.

Notification of failure or likely to fail

The RRD requires IFPRU 730k firms and entities in a group containing a 730k firm or credit institution to notify its competent authority where its management body considers that the firm or group entity is failing or likely to fail. For the firms that are regulated prudentially by the FCA, this notification must be made to the FCA.

In IFPRU 11.7, we have listed the circumstances in which the management body should consider that the firm or group entity is failing or likely to fail. These are summarised below:

  • the assets of the firm or group entity are less than its liabilities
  • there are objective reasons to believe that the assets of the firm or group entity will become less than its liabilities in the near future
  • the firm or group entity is unable to pay its debts or other liabilities as they fall due
  • there are objective reasons to believe that the firm or group entity will become unable to pay its debts or other liabilities in the near future
  • the firm or group entity needs extraordinary public financial support
  • the firm is failing to satisfy any of the threshold conditions
  • there are objective reasons to believe that the firm will fail to satisfy any of the threshold conditions in the near future

If the management body considers that one or more of these circumstances have occurred, the firm or group entity must notify us immediately. The firm or group in question should email the notification to:

Firms and group entities should also consider the EBA Guidelines on the interpretation of the circumstances in which an institution shall be considered as failing or likely to fail.