Recovery and Resolution Plans: the road to where?

The UK FSA's proposed requirements for recovery and resolution plans (RRPs), published on 9 August, set out a road-map for firms to follow in completing recovery plans and providing detailed information and analysis to the authorities on resolution by June 2012.

The tough and uncompromising message to firms is that they will be expected to formulate - and to implement when required - credible recovery options, and that the authorities will take the lead in constructing resolution plans. However, remaining uncertainties make it difficult for firms to be sure about how far they will need to restructure themselves in order to satisfy the authorities.

The main proposals on RRPs apply to all deposit-takers and large investment firms (with assets exceeding £15 billion). In addition, any firm that holds client money or client assets will have to take action to shorten the time it might take to return client money and assets in a resolution.

The FSA recognises that these proposals will need to be developed alongside the outcomes of the Independent Commission on Banking, the EU’s consultation on crisis management, and the Financial Stability Board’s proposed standards for resolution regimes.

Implications for firms

  • Firms’ recovery plans will need to extend beyond current processes for managing capital and liquidity under stress. These plans will need to be properly governed; address a wider and tougher set of stresses; take a more integrated approach; identify possible asset and business sales; and establish a clear set of predetermined triggers for taking recovery actions.
  • Resolution plans will be prepared by the authorities, not by firms. Resolution plans will aim to resolve a failing firm over a very short period – the proposals refer to a "resolution weekend".  
  • As input to resolution plans, firms will have to provide a large amount of information and a detailed analysis of (i) the economic functions undertaken by the firm; (ii) how any critical economic functions could be separated from non-critical activities; and (iii) how any barriers to a rapid resolution could be removed – including through the up-front restructuring of legal entities, service agreements and intra-group transactions. The FSA may use the equivalent of section 166 reports to test the feasibility of resolution plans.
  • Final rules are expected to be in place in the first quarter of 2012, with firms given until June 2012 to prepare their initial RRPs. 
  • Although the consultation provides firms with a lot of detail about RRPs, some key uncertainties remain, including where the triggers for recovery actions should be set; whether a clear distinction can be drawn in practice between recovery and resolution; what the authorities will regard as being a sufficient degree of separation of critical economic functions within a firm to enable an effective resolution to be undertaken; and whether (and if so how) 'Pillar 2' capital surcharges might be calibrated to take account of the strengths or weaknesses in a firm’s RRPs.
  • The FSA’s discussion paper makes clear that there may be more to come on the trading book; payment, clearing and settlement systems; and the use of bail-in debt.        
  • These proposals apply to all firms within scope, not just the largest and systemically important firms. Smaller firms will be expected to take a proportionate approach to RRPs, but it is not yet clear what this will mean in practice.  
  • Although insurance companies are excluded from the current proposals, similar requirements may be placed on insurers in due course.

Recovery plans

Firms are already required to hold capital and liquidity planning buffers and to put in place contingency arrangements for dealing with shortfalls of capital and liquidity. But the proposals for recovery planning go further than this in terms of:

  • integrating more closely all elements of the recovery plan, and incorporating this more centrally into the firm’s governance frameworks and processes, including annual Board approval of a firm’s recovery plan;
  • the severity of the stresses and scenarios that should be considered, covering both firm-specific and market-wide events;
  • the range of credible recovery options that should be considered, including the disposal of assets, businesses or entities; capital raising and liability management; the elimination of dividends and variable remuneration; and the sale of the firm to a third party; and
  • developing a set of predetermined triggers that would initiate the recovery actions.

These extensions of contingency planning leave open a number of questions. First, it is not clear to what extent, and over what timescale, firms will be allowed to rely on running down (and then restoring) capital and liquidity planning buffers – or, indeed, whether these buffers will have to be increased in the absence of other credible recovery options. Second, although firms are left to set their own trigger framework in the first instance, supervisors will want to link this closely to the "proactive intervention framework" being developed for use by the future Prudential Regulatory Authority – including the point at which the authorities may trigger the resolution regime. Related to this, firms will need to consider the extent to which they can draw a clear distinction between recovery and resolution, in a world in which market pressures in response to difficulties may make it impossible for firms to undertake successful recovery actions.

Resolution plans

The consultation paper emphasises that a resolution plan is to be prepared by the authorities. But this will be based on the information and analysis provided by firms, including:

  • significant entities, and key structural and operational issues relevant to the separation of these entities during a resolution – with a particular emphasis here on data on interbank and trading book exposures;
  • the economic functions undertaken by the firm, and an assessment of the importance of these functions to the financial system and the wider economy;
  • for any 'critical' economic functions (as agreed between the firm and the authorities), an analysis of how the separation or winding down of these functions might operate, and of the barriers to a rapid and effective separation or winding down;
  • plans to overcome any barriers that the authorities deem to be unacceptable; and
  • skilled persons reports that test the feasibility of resolution plans.

The paper makes clear that one objective of the authorities is to be able to sell, transfer, or take into a bridge bank only those assets, liabilities and contractual relationships necessary to facilitate the continuity of critical economic functions. But there are a number of uncertainties here about:

  • how critical economic functions are to identified. The paper includes a list of 25 functions to be considered, and suggests a proportionate approach, but it is clear that in some cases firms will be regarded as providing a critical economic function simply because of the nature of the function (eg retail deposit-taking), irrespective of the size of the firm in that market, and then be expected to undertake the "separation or wind-down" analysis;
  • what test is to be applied to the sufficiency of "separation or wind down"'. Although the paper refers to various dimensions of proportionality, firms will find it difficult to identify what is acceptable in terms of the extent to which a critical economic function can be separated or wound down in the event of a resolution, and therefore what barriers might need to be addressed.
  • what constitutes an acceptable degree of separation of critical economic functions within a firm. The paper observes that separability can be strengthened in advance through the simplification of intra-group relationships, changes in corporate and operational structure and contractual arrangements, and increased stand-alone capacity, but it is not clear what will be regarded by the authorities to be sufficient up-front separability in these areas. How far do critical economic functions need to be located in separate legal entities, with their own dedicated operational support? The final recommendations of the Independent Commission on Banking will also be important here.
  • the extent to which the UK authorities will seek to align the location of critical economic functions with the scope of their Special Resolution Regime (SRR) powers. The paper notes that the SRR powers apply to UK-authorised deposit-takers. So the authorities may encourage firms to locate their critical economic functions within, or as subsidiaries of, UK-authorised deposit-takers. This could have a particular impact on how foreign banks structure their business in the UK.

Firms will also be required to nominate an executive director to be responsible for the firm’s recovery and resolution plans, and to put in place continuing monitoring, data maintenance, and updating of RRPs.

On cross-border groups, the paper proposes that UK headquartered groups will need to submit a group-wide resolution plan to the FSA, covering their overseas branches and subsidiaries. For branches of foreign firms the FSA will expect the home regulator to share relevant sections of RRPs with the FSA.  But while supporting greater cooperation and coordination among national resolution authorities (as proposed in the EU’s consultation on crisis management), the paper makes clear that the view of the UK authorities is that in carrying out a resolution each national resolution authority must remain ultimately responsible for the legal entities incorporated in its jurisdiction.

Unresolved issues

The discussion paper highlights a number of issues for further consideration, where the authorities are still searching for solutions to facilitate effective resolution. These include:

  • the difficulties in the resolution of trading books, as highlighted by the aftermath of the collapse of Lehman Brothers;
  • how in practice the international calls for some form of debt 'bail in' could be introduced;
  • barriers to resolution arising from firms’ membership of payment, clearing and settlement systems; and
  • the differences between the EU and the US approaches to the resolution of branches, where the EU treats branches as being part of a single entity, while the US takes a territorial approach.

Client money and client assets

Firms holding client money or client assets will be required to put in place additional record-keeping and documentation, and to be able to retrieve this information within 48 hours, in order to facilitate the speedy return of client money and client assets within a resolution.


The FSA expects to publish final rules in the first quarter of 2012, with transitional provisions that would give firms until June 2012 to prepare their initial RRPs.

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Publication Number: RRD-258528


Key contacts
Iain Cummings
Andrew Davidson

CoE contacts
Giles Williams

Jon Pain
Clive Briault

FSA consultation paper

Financial Stability Board

Additional reading
The Implications of Recovery and Resolution Plans

KPMG alert - G20 makes progress on SIFIs…

Recovery and Resolution Planning - asking the right questions