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The new world of living wills

Paul Edmondson and Ash Saluja

23rd February 2010

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Outline

Key messages – ‘failure management’ (Ash)

Living wills under FSA (Paul) –

– RCPs

– RSPs

The client asset/money storm (Ash)

– The new Client Asset Authority (the CAA)

and client assets trustee (CAT)

– Lessons from Lehmans

– FSA supervision/enforcement

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Background

Lessons learnt from –

– Northern Rock – no recovery plan and needed SRR

powers to resolve

– RBS, Lloyds etc – un-resolvable even with SRR –

too big/complex/inter-connected

– Lehmans – resolution was much worse that it should

have been

– The regulatory regime/authorities had not faced up

to the realities of firm failure

‘failure management’ will therefore be a broad new

regulatory focus across sectors

– Although some specific tools will have narrower

scope

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Key messages - questions for any

executive director or NED

what would trigger stress or failure?

how to avoid that happening?

planning how to deal if it does?

showing that the impacts of failure (systemic or

consumer) are acceptable.

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Key messages - focus on separate legal

entities

Global in life – national in death

As a going concern, a group often operates as a single entity–

– but as gone concern,it is resolved/wound up as separate legal entities

legal entity focus –

– Accounting information

– RRPS – particularly RSPs

– Survivability – management, systems, central services, third party suppliers - may be organised across legal entities

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Background - international

pilot with 30 odd institutions

FSB/Basel - Working on cross border issues

– Crisis management

– Different insolvency and bank resolution

laws

EU –

– recent high level consultation

– still thinking

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Background – international: problems

still to be solved

Cross-border entities –

– Branch states versus home state

– Conflict –

– Ring-fencing for local depositors

– Insolvency law conflict

– Winding up directive in EU

Group level co-ordination of subsidiary plans

– International co-ordination at group level?

Can this be done without agreement on burden sharing between states?

Living wills under FSA - recovery

and resolution planning

Paul Edmondson

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Domestic UK regime

FS Bill

– Broad powers for RRP rules

– HMT requirements on FSA

FSA

– 4 bank pilot

– Another consultation on rules and scope

HMT consultation

– Focusing on investment business (Lehmans) – closes 16/3/10

– Read-across to deposit taking – e.g. BROs?

Conservative and BoE support RRPs

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Scope of UK RRP regime

FS Bill powers applicable to all firms

Must include all (UK) deposit takers under SRR

FSA consultation shortly on other firms

– Investment firms

– Insurers, life offices, funds and others

– Is it only firms which are

– Large

– Systemically important

– With large consumer exposure or client assets?

– Where to draw the line? Under the Tories - all BoE

supervised firms?

EEA firms will follow home state rules?

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RRP regime – scope and other issues

Insurers and life offices (and non-banks)

– Need to push back?

– Turner admits banks are special/different

UK insurer failure/resolution not a major problem in the crisis

Current focus on banks but insurer failure/resolution involves very different issues

– Insurers already ring fenced

– A history of resolutions without disaster

– Lessons from Equitable Life recovery?

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Recovery plan (RCPs)

How the firm will react under stressed conditions as a going concern

– Capital and liquidity recovery plan

– CoCo and other capital/liquidity insurance

– Selling businesses and/or raising capital

– De-risking

– Contagion control

– Plan implementation

– Triggers and dependencies

– Operational, legal and financial barriers

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RCPs – who does what?

The firm

– Owns

– Maintains

– Implements

The authorities

– Review

– Require changes or external review

– Approve

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RCPs - CoCos

“If CoCos could form a material part of recovery plans, the landscape might just be transformed”

Used by LBG and ?

– To replace existing [impaired] hybrid capital

– Capital ratio trigger

– New capital raising before trigger reached?

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Resolution plan (RSPs)

What will happen if the firm fails and RCP not going to save it?

Gone concern planning

– SRR resolution plan for deposit takers –

e.g. retail deposit transfer to another bank and rump transfer to bridge bank

– Winding up plan for other firms under relevant insolvency law

– Review of barriers and solutions

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Resolution plan (RSPs)

Investment business

– Phase 1: internal action

– Phase 2: market facing action in pre-insolvency corridor

BIP – Business Information Packs

Data access

Unplugging from the financial system

Mapping

– Legal entity and group relationships

– What happens on failure

– Contingency arrangements

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RSPs – who does what?

The resolution authorities –

– Produce the essentials of the plan (e.g. SRR steps)

– Require change or external review

– Approve the final plan

– Own the plan

– Trigger resolution

– Implement the plan

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RSPs – who does what?

The firm has a vital role –

– Producing information and analysis for initial plan

– Developing and testing for the authorities

– Ensuring post approval business development does not undermine

– Maintaining plan and data

BRO – Business Resolution officer

Audit

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RRP approval process – who does

what?

FSA contact point

– BoE lead for banks and building societies

– Tripartite consultation

Under Conservative reforms –

– BoE would deal with all RRPs

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Using the RRP process to require

fundamental change

“Can I recover from these stressed scenarios with my current business model”

“Key objectives for resolution plans – a means to deal with the “too complex to resolve” state by

demonstrating where structures need to be changed… ”

“ I see RRPs as a device to enable tough questioning of structures and business models…”

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The end game on RRPs

“With this structure and business model, could I [the resolution authority] achieve a resolution at acceptable cost….”

An acceptable resolution outcome - measured against what?

– Systemic impact

– Consumer impact

– Deposit protection fund impact

– Pre-funded and risk based

Is there an acceptable level of rescue risk/cost –e.g. if it is supported by pre-funded levy scheme?

On-going requirements - RRPS

and client money/assets

Ash Saluja

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More internal policeman (as well as

multiple external authorities)

BRO (Business Resolution Officer) –

– Board level funeral director in residence

– Point of contact for the resolution authorities

– Policing on-going requirements

– Available when it happens

CAO (Client Asset Officer)

– Increased focus on personal accountability for client asset/money protection

– Reporting to CAA and CAT

NEDs, CRO etc

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Maintaining RRPs

“… creating a permanent state of readiness….”

Board business decisions making –

– Will need to consider impact on RRPs and

resolution

– Approval may be required if significant change involved

Insolvency proofing of key contracts –

– staff and services

– Operational reserve

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Maintaining RRPsSupported by up to date

– Business Information Pack (BIP) – ?regular auditing, stress testing and approval

– Legal entity financial reporting

– Legal analysis of group structure/relationships

– Business information and risk management

– Business strategy and decision making

– Personnel

– Key operational costs and logistics

– Data

– Virtual data rooms

– On-shoring of critical data or other solutions?

– SCV (Single customer view) on FSCS insured deposits– pre-report to FSA by 31/7/10 and implementation at end 2010

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The role of legal and compliance

Mapping the group

– Initial FSA high level request

– Key role for treasury/finance department but legal role -

Dry running and sign-off on lack of legal barriers

– RCP as a going concern

– RSP as a gone concern

– The trust estate (client assets/money)

– BIPs

Dealing with the internal and external policeman

– FSA/BoE

– BRO, CAO, CRO

– Auditors

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The growing storm - client money and

asset protection

Lehmans debacle and problems in other sectors

– HMT, FSA and the courts

Clients not protected as they thought –

– Limitations of the CASS regime not

understood

– Defects in the rules

– Failures by firms to operate correctly

– Failures by auditors to appreciate

Trust law and other legal complexity

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The growing storm - client money and

asset protection

FSA Dear CEO letter

– All sectors

– Compliance and responsibility

– FSA Enforcement

– Accountant/auditor failures

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Client money and asset protection –

regime change?

New authorities

– The CAA (Client Assets Agency)

– The CAT (Client Asset Trustee)

Client asset officers (CAO) – single approved person responsible for CASS compliance and

the trust estate?

– CP10/3 and further CP

HMT post Lehmans consultation – closes 16th

March

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Client money/assets – what is coming?

New rules – increased

– transparency and product warnings

– risks of permitting firm use/charging

– Reporting, record keeping and audited disclosures

FSA review

Bankruptcy remote SPVs to hold assets and custodian lien changes

Different client money pools and allocation of shortfalls

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