Banking Industry Regulatory Update - Reed Smith

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SPECIAL RESOLUTION REGIMEPart 1 of the Banking Act 2009, which came into force on 21 February 2009, creates a specialresolution regime (“SRR”) for dealing with UK banks that get into financial difficulty. The SRR consistsof three stabilisation (pre-insolvency) options, a bank insolvency procedure and a bank administrationprocedure.The three stabilisation options are the ability to transfer part or all of a failing bank or building societyto a private sector purchaser, a publicly controlled bridge bank (a company wholly owned andcontrolled by the Bank of England), and to temporary public ownership (to a nominee of the Treasury).There has been concern that the ability to transfer part of a failing bank would lead to legal uncertaintyand a reduction in confidence of counterparties in doing business with such firms, especially for thosecounterparties entering into close-out netting arrangements.The Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009 (more commonly knownas the Safeguards Order) protects transactions commonly found in set-off, netting and collateralarrangements from being partially transferred to another entity. The protection extends to swaps,options, futures contracts, contracts for difference and other types of derivatives contracts. Despitethis protection, the general lack of clarity surrounding the partial transfer of rights may make potentialcounterparties more hesitant in dealing with UK banking entities.Although the Tripartite Authorities have acknowledged that such powers may remove or adverselyaffect property, employment and other rights, they believe it justified in relation to the EuropeanConvention on Human Rights on “strong public interest grounds.”The Treasury will be advised on the impact of the special resolution regime on financial markets bythe Banking Liaison Panel, consisting of representatives of the Treasury, FSA, the Bank of England,the Financial Services Compensation Scheme (“FSCS”) and the banking sector, together withfinancial law and insolvency experts. The Panel will have ongoing responsibilities to keep the powersand regulations of the regime under review.FINANCIAL SERVICES COMPENSATION SCHEMEIn light of the events at Northern Rock, the Tripartite Authorities are concerned that the arrangementsfor depositor protection under the FSCS are inadequate in protecting customers and supportingmarket confidence.As a result, in October 2008 the FSA amended the rules in its compensation sourcebook (“COMP”) byincreasing the limit for depositors to £50,000 per institution. COMP was further amended in November2008 to allow a building society that merges with another and continues to operate under its formername post-merger, to keep its separate £50,000 deposit protection limit.– 10 –
New FSCS PolicyIn order to minimise hardship to depositors, PS09/11 (published on 24 July 2009) sets out the FSA’sfinal policy and rules on speeding up the payment of compensation by the FSCS to depositors in theevent a deposit-taking firm fails, and of the FSCS generally.The new payout rules will mean many individuals and small businesses will receive compensationwithin seven days and all payments within 20 days as required under the Deposit GuaranteesSchemes Directive. The fast payout rules will come into force on 31 December 2010.Future payouts will be made on a ‘gross’ basis, which will effectively ring fence the deposits if adepositor has savings and loans with the same firm. Consumer awareness of the FSCS will also beboosted by a new rule, which comes into force from 1 January 2010, requiring firms to provideinformation on the existence of the FSCS and level of protection it offers to depositors, as well asproactively informing customers of any additional trading names under which the firm operates.Further changes announced include ensuring that firms keep up-to-date information on customers toallow quick processing of claims by the FSCS if needed. This so-called ‘single customer view’information enables deposit takers to provide an aggregate balance held by each depositor to ensurefaster payout of compensation in the event of a default of a deposit taker. The FSA has alsointroduced changes to the calculation of payment of compensation on term accounts, which will meanthat compensation is calculated as at the date of default (as opposed to the date when the contractends).The FSA has also extended, until 30 December 2010, its interim rules which allow separatecompensation cover for customers with deposits in two merging building societies. The sameextension has been made for customers of a building society which merges with a subsidiary ofanother mutual society, and for customers whose deposits are transferred from a failed firm to anotherdeposit taker where they already have an account.Temporary high deposit balancesCP09/11 outlines proposals that the FSCS should provide extra protection for depositors holdingtemporary high deposit balances at a single deposit-taking institution in the event of failure of adeposit taker. The FSA is proposing a maximum protection limit of £500,000, for up to six months, forclaims in relation to temporary high balances arising in connection with the sale of a main residence,pension lump sums, inheritance, divorce settlements, redundancy payments and proceeds of pureprotection contracts.The FSA has explained that if a common protection limit of €500,000 will come into force across theEU in December 2010, as proposed by the Deposit Guarantee Schemes Directive (“DGSD”), it will notbe able to introduce higher protection for temporary high balances, unless the EU agrees that anexemption should be made.The consultation paper also sets out the changes required to implement the Directive. Most of thesechanges came into force on 30 June 2009 and include a €50,000 minimum limit of protection fordeposits and a new time limit of 20 working days to pay claims for deposit compensation (though thiscomes into force on 31 December 2010).The FSA has stated it believes it is best to wait until it is clear what any amendments to the DGSDmight do before it takes a decision about making new rules, and has published details of theresponses it received in relation to temporary high deposit balances in PS09/11.– 11 –
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Page 4: APPROVED PERSONSOn 27 July 2009 the
Page 8 and 9: STRESS TESTINGThe FSA has set out p
Page 12 and 13: Compensation LimitsIn April 2009 th
Page 14 and 15: HM Treasury proposalsThe UK Governm
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Banking Industry Regulatory Update - Reed Smith

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