In a consultation paper revealed yesterday by the FSA, ‘living wills’ will be a requirement for Systemically Important Financial Institutions (SIFIs) that will include deposit-takers such as banks and investment houses.
The paper – Recovery and Resolution Plans (RRP) – makes a number of proposals aimed at reducing the impact of the failure of large financial institutions, particularly in relation to their investment and custody business. It follows the Financial Services Act 2010 which made it law for all UK deposit-takers to have RRPs in place.
Protect taxpayers
At its launch, the FSA said the 2008 financial crisis highlighted that “firms failed to have effective recovery plans in place.” It added: "Had firms had such plans in place prior to the advent of the crisis, they might well have been able to cope better with the stresses that developed and failures might have been avoided.”
The consultation paper sets out the FSA’s proposals about what is expected of firms with regards to planning for a stressed situation, which will require a firm to take action to recover or if necessary wind down in an orderly manner without putting taxpayers at risk of loss.
Thomas Huertas, a member of the FSA’s executive committee, said: “The financial crisis highlighted that firms failed to consider what they would need to do when faced with a potential failure of their business models. The result meant that billions of pounds of public money was required to support financial institutions around the globe and that financial stability was put at risk.
“This consultation will play an important role in helping authorities develop their policy in this complex area.”
The recovery plan proposals set out by the FSA are aimed at reducing the likelihood of failure by requiring firms to identify ways in which a recovery may be achievable. The plans must be developed and maintained by the firm, in coordination with the FSA. The watchdog sets out a number of features which must be included within the plans. These include (not exhaustively):
- sufficient number of material and credible options to cope with a range of scenarios including distinctive and market-wide stresses;
- otions that address capital shortfalls, liquidity pressures and profitability issues that should aim to return the firm to a stable and sustainable position;
- options that the firm would not consider in less severe circumstances such as: disposals of the whole or parts of its business; unplanned raising of equity capital; complete elimination of dividends and variable remuneration; and debt exchanges and other liability management actions.
Full wind down
Meanwhile, the institutions will also have to draw up plans for a full wind down of the business if it fails. These plans must (again, not exhaustively):
- ensure that resolution can be carried out without public solvency support exposing taxpayers to the risk of loss;
- seek to minimise the impact on financial stability;
- seek to minimise the effect on UK depositors and consumers;
- allow decisions and actions to be taken and executed in a short space of time.
In addition, the consultation paper also sets out proposed requirements relating to the client money and custody assets held by an investment business – known as the CASS Resolution Pack. This pack aims to promote the speedier return of assets to clients once a firm has failed by ensuring vital information is readily available to the administrator.
The FSA confirmed once the consultation is complete it will issue a policy statement towards the end of this year with an expectation that some firms will have RRPs in place by 30 June, 2012.
