Source: https://blogs.lexisnexis.co.uk/content/banking-and-finance/implementation-of-the-bank-resolution-and-recovery-directive
Timestamp: 2019-04-26 01:45:20+00:00

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What should lawyers be considering as the Bank Recovery and Resolution Directive continues its journey to full implementation? Dennis Dillon, a US-qualified partner in the international finance group at Hogan Lovells, looks at the cross-border effectiveness of the bail-in power contained in art 55.
Regulatory Technical Standards (RTS) on the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and on the contractual recognition of bail-in have been published by the European Banking Authority (EBA). Both standards provide further specification of essential elements to ensure the effectiveness of the resolution regime established by the Bank Recovery and Resolution Directive 2014/59/EU (BRRD).
What is the background to the RTS?
The BRRD sets out a recovery and resolution process for certain ‘institutions’. The purpose of the BRRD is to lay down rules and procedures relating to the recovery and resolution of institutions by providing national authorities with harmonised tools and powers to tackle crises at banks and certain investment firms at the earliest possible opportunity to minimise consequences for the broader financial system and remove the moral hazard of taxpayer funded bail-outs.
The BRRD became effective on 2 July 2014. Member States were required to enact domestic implementing legislation by 31 December 2014, with the exception of the bail-in power and the contractual recognition of bail-in provisions which do not need to come into force until 1 January 2016. In the UK, the BRRD has been implemented by way of changes to the Banking Act 2009. However, the UK chose to implement the bail-in provisions at the same time as most of the other provisions, from 1 January 2015.
Under the BRRD, the EBA is required to issue technical standards on a number of issues which will become binding once approved by the European Commission. RTS 2015/06 is the RTS dealing with the requirements of BRRD, art 55. Although issued as a final draft on 3 July 2015, we understand it has not yet been adopted by the European Commission.
BRRD, art 55(3) requires the EBA to develop draft RTS in order to further determine the list of liabilities to which the exclusion in BRRD, art 55(1) applies and the contents of the term required in that paragraph, taking into account banks’ different business models. However, because any change to the exclusions would require a change to the BRRD itself, the RTS doesn’t apply a de minimise threshold or introduce new exclusions for the requirement. What it does do is set out what needs to be covered in the contractual recognition statement and clarify certain elements of the art 55 text.
What entities are within scope of BRRD, art 55?
In very broad terms, this means that the BRRD (including art 55) will apply to most large EU-incorporated banks and financial institutions and may catch smaller institutions if they are considered systemically important.
What is the impact of BRRD, art 55 on in-scope entities?
Considerable. The requirement is that contracts governed by the laws of non-EU jurisdictions should contain contractual recognition clauses if they give rise to liabilities which could be bailed-in by the relevant resolution authority.
The PRA policy statement adds to the difficulty by stating that the requirement applies to liabilities issued, created or arising after that date. The impact is that in-scope institutions will have to try to introduce recognition clauses when existing contracts are materially amended, or if new liabilities arise under existing agreements.
The other issue is the very wide scope of the term ‘liability’. In some cases where the financial institution is the borrower or is the entity raising funds by issuing bonds it will be clear that a liability has arisen. However, it will also potentially apply to other liabilities such as an undrawn commitment under a loan where the financial institution is the lender, any indemnity given by the financial institution (for example under a loan agreement or an intercreditor agreement), or contingent liabilities under guarantees or letters of credit. It would also catch liabilities of the financial institution to certain non-essential suppliers. Liabilities to commercial or trade creditors in respect of goods or services that are critical to the daily functioning of its operations are excluded from the scope of bail-in and so from art 55 (these include IT services, utilities and the rental, servicing and upkeep of the premises). However, it is up for debate as to which services are ‘critical’ and which aren’t—how about the catering company providing an in-house restaurant? Even though it is generally thought that these liabilities would be unlikely to be bailed in in practice, the requirement for a contractual statement of recognition still applies.
When will the provisions of BRRD, art 55 and the recommendations of the RTS come into force, both in the UK and throughout the EU?
See above for the BRRD and the UK. For the rest of the EU, the implementation date should be 1 January 2016 at the latest—however, we are aware that some jurisdictions have not yet implemented any part of the BRRD and that would include art 55.
What should affected entities do to ensure compliance with BRRD, art 55 and the RTS, and what challenges is this likely to pose?
What advice should lawyers be giving to their clients?
As there is no de minimis threshold and failure to comply with the requirement can lead to regulatory sanction, lawyers need to be advising clients to consider what types of contract they are likely to be entering into (and with whom) and which will be affected—they then need to review existing contracts governed by the laws of a non-EU jurisdiction to the extent liabilities will be created or arise under them after 1 January 2016 and put in place systems to ensure new contracts entered into contain the relevant contractual recognition clause. Early discussions with key counterparties (ie those with whom the institution contracts on a regular basis) should be encouraged—it might, for example, be possible to agree a single side agreement which would apply to all contracts entered into with that counterparty and under which a contractual recognition clause is deemed included in each relevant contract. Finally, the institution needs to be able to demonstrate to the regulator that they have appropriate and robust systems in place for ensuring compliance. All of which is easier said than done.

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