Barclays 2015 Annual Report Download - page 215

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The Banking Act also gives the authorities powers to override events of
default or termination rights that might otherwise be invoked as a result
of the exercise of the resolution powers. The Banking Act powers apply
regardless of any contractual restrictions and compensation that may be
payable in the context of both share transfer orders and property
appropriation.
The resolution powers described above were supplemented with effect
from 31 December 2014 by a ‘bail-in’ power introduced under the
Banking Reform Act. This power allows for the cancellation or
modification of one or more liabilities (with the exception of ‘excluded
liabilities’).
Excluded liabilities include (among other things): deposits protected
under a deposit insurance scheme, secured liabilities (to the extent that
they are secured), client assets and assets with an original maturity of
less than seven days which are owed to a credit institution or investment
firm. The BoE’s new bail-in powers were brought into force with effect
from 1 January 2015.
In a consultation paper published in 2015, the BoE indicated that during
2016 it would notify banks of the final MREL requirements which would
apply to them from 1 January 2020, when the regime will become fully
effective. The Bank intends to apply MREL standards on a transitional
basis from 2016 until that time. As noted above, during the consultation
process, the BoE announced that it intends to set MREL for UK G-SIBs
consistently with the FSB’s TLAC standards, and will not set any TLAC
requirement for a UK G-SIB which is separate from or different to its
MREL.
Since 20 February 2015, UK banks and their parents have also been
required to include in debt instruments, issued by them under the law of
a non-EEA country, terms under which the relevant creditor recognises
that the liability is subject to the exercise of bail-in powers by the BoE.
Similar terms will be required in contracts governing other liabilities of
UK banks and their parents if those liabilities are governed by the law of
a non-EEA country, are not excluded liabilities under the Banking Act
2009 and are issued, entered into or arise after 31 December 2015. The
PRA has made rules and will be consulting further in relation to
contractual recognition of bail-in of liabilities governed by third country
laws.
The Banking Act also gives the BoE the power to override, vary, or
impose conditions or contractual obligations between a UK bank, its
holding company and its group undertakings, in order to enable any
transferee or successor bank to operate effectively after any of the
resolution tools have been applied. There is also power for HM Treasury
to amend the law (excluding provisions made by or under the Banking
Act) for the purpose of enabling it to use the regime powers effectively,
potentially with retrospective effect.
The Financial Services Act 2010, among other things, requires the UK
regulators to make rules about remuneration and to require regulated
firms to have a remuneration policy that is consistent with effective risk
management. The Banking Act also amended FSMA to allow the FCA to
make rules requiring firms to operate a collective consumer redress
scheme to deal with cases of widespread failure by regulated firms to
meet regulatory requirements, that may have created consumer
detriment.
The PRA has made rules that require authorised firms to draw up
recovery plans and resolution packs. Recovery plans are designed to
outline credible recovery actions that authorised firms could implement
in the event of severe stress in order to restore their business to a stable
and sustainable condition. The resolution pack contains detailed
information on the authorised firm in question which will be used to
develop resolution strategies for that firm, assess its current level of
resolvability against the strategy, and to inform work on identifying
barriers to the implementation of operational resolution plans.
In addition to establishing the FPC, PRA and FCA, the Financial Services
Act 2012 among other things clarifies responsibilities between HM
Treasury and the BoE in the event of a financial crisis by giving the
Chancellor of the Exchequer powers to direct the BoE where public
funds are at risk and there is a serious threat to financial stability. The
Financial Services Act 2012 also establishes the objectives and
accountabilities of the FPC, PRA and FCA; amends the conditions which
need to be met by a firm before it can be authorised; gives the FPC, PRA
and FCA additional powers, including powers of direction over
unregulated parent undertakings (such as Barclays PLC) where this is
necessary to ensure effective consolidated supervision of the Group; and
gives the FCA a power to make temporary product intervention rules for
a maximum period of six months, if necessary without consultation. The
Financial Services Act 2013 also created a new criminal offence relating
to the making of a false or misleading statement, or the creation of a
false or misleading impression, in connection with the setting of a
benchmark.
Structural reform of banking groups
In addition to providing for the bail-in stabilisation power referred to
above, the Banking Reform Act requires, among other things: (i) the
separation of the retail and SME deposit-taking activities of UK banks in
the UK and branches of UK banks in the European Economic Area (EEA)
into a legally distinct, operationally separate and economically
independent entity, which will not be permitted to undertake a range of
activities (so called ring-fencing); (ii) the increase of the loss absorbing
capacity of ring-fenced banks and UK headquartered global systemically
important banks to levels higher than required under CRD IV and (iii)
preference to deposits protected under the Financial Services
Compensation Scheme if a bank enters insolvency.
The Banking Reform Act also implements key recommendations of the
Parliamentary Commission on Banking Standards. Recommendations
that have been implemented include: (i) the establishment of a reserve
power for the PRA to enforce full separation of UK banks under certain
circumstances; (ii) the creation of a ‘senior manager’s’ regime for senior
individuals in the banking and investment banking sectors to ensure
better accountability for decisions made; (iii) the establishment of a
criminal offence of causing a financial institution to fail; and (iv) the
establishment of a regulator for payment systems.
The Banking Reform Act is primarily an enabling statute which provides
HM Treasury with the requisite powers to implement the policy
underlying the legislation through secondary legislation. Secondary
legislation relating to the ring-fencing of banks has now been passed.
Parts of the secondary legislation became effective on 1 January 2015
and the rest will come into effect on 1 January 2019 by which date UK
banks will be required to be compliant with the structural reform
requirements. The PRA published ‘near final’ rules on the legal structure
and governance of ring-fenced banks in May 2015 and a consultation
paper on post-ring-fencing prudential requirements and intra-group
arrangements (among other things) in October 2015. PRA final rules are
expected in 2016.
Compensation schemes
Banks, insurance companies and other financial institutions in the UK are
subject to a single compensation scheme (the Financial Services
Compensation Scheme – FSCS) which operates when an authorised
firm is unable or is likely to be unable to meet claims made against it by
its customers because of its financial circumstances. Most deposits
made with branches of Barclays Bank PLC within the EEA are covered by
the FSCS. Most claims made in respect of investment business will also
be protected claims if the business was carried on from the UK or from a
branch of the bank or investment firm in question in another EEA
member state. The FSCS is funded by levies on authorised UK firms such
as Barclays Bank PLC. In the event that the FSCS raises those funds
more frequently or significantly increases the levies to be paid by firms,
the associated costs to the Group may have a material impact on the
Group’s results.
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