RegTech Intelligence 
Last week, HMT published a consultation paper on secondary legislation to extend the 2009 UK Special Resolution Regime – which currently only covers banks – to investment firms, CCPs and group undertakings.
While the legislation mostly concerns the rights of resolution authorities to enforce special insolvency processes on these firms if they fail, with power comes the need for resolution planning and, thus, regulatory reporting and restructuring requirements for the firms affected. This includes requirements to safeguard the continuity of critical functions, mapping legal entities and financial inter-linkages and storing and reporting financial contracts to aid the regulators in preparing for resolution.
This is further indication that the UK is front-running non-bank resolution standards ahead of relevant EU rules, and that UK FMIs and investment firms are acting as guinea pigs for non-bank RRPs in the shaping of best practice in this area.
The definitions used are interesting because they may determine the scope of other costly resolution requirements, such as the writing of RRPs. The definition of ‘investment firms’ included in this legislation is those with initial capital of over £730,000 for the purposes of the CAD (‘bipru 730k firms’) – HMT estimate that there are 250 firms in this category. It is not yet certain how this will overlap with the definition of D-SIFIs used for the purposes of RRPs, which has yet to be written into UK law.
Regarding banking group companies, the resolution regime now extends to any undertaking within the same group structure of a bank – i.e., subsidiaries and holding companies – as long as they are mainly “engaged in financial services” or providing services to FS companies in the group. This will also apply to firms in the same group as investment firms or CCPs.
It remains unclear whether, and under what circumstances, this will lead to these group entities producing individual RRPs. For example, will we now see individual investment firm group entities drawn into the whole costly apparatus of recovery planning and resolution reporting which goes hand in hand with the resolution regime? Precisely this uncertainty was an issue raised by many banks in response to the recent EBA consultation on assessing recovery plans. It may not now be a bank-only problem.
With these laws, the UK government is implementing some of the requirements in the EU RRD ahead of schedule, further confirming their front-running position globally. The RRD is due to be debated in February and the text finalised early 2014, although this date has already been pushed back twice in the last month. Given the looming EU election, the date that EU standards on financial sector resolution regimes and their requirements for firms will be set in stone is uncertain and this gives even more scope for divergence from the UK’s early stance.
As HMT state, “Given the uncertainty around the timetable for introducing any European legislation in this area, the UK government has actively sought to meet the FSB recommendations, by pressing ahead with domestic legislation”.
Is the UK’s proactive approach risking the duplication of both cost and effort of implementation if the EU directive changes significantly before transposition?