Published: 28th August 2014

IFPRU 2.5 (‘Recovery and resolution plans’) is applicable to all IFPRU investment firms and has been in force since the beginning of this year.

It must qualify as one of the shorter chapters in the Handbook, consisting as it does of only two Rules.

The first rule was for a firm is to have in pace both a recovery plan for restoration of its financial situation following a significant deterioration and a viable resolution plan setting out options for the orderly resolution of the firm in the case of failure.

The second rule simply required the firm to cooperate with the ‘resolution authorities’ and to provide them with all necessary information for the drafting of their resolution plans.

The two rules were based upon CRD Article 74(4) and whilst the latter did contain reference to proportionality there was no similar reference to the application of proportionality in IFPRU 2.5.

Fortunately (unless you are an IFPRU 730K firm) the Recovery and Resolution Directive (2014/59) (RRD) has removed this requirement by virtue of Article 124 which deletes CRD Article 74(4); in turn the definition of an ‘investment firm’ in the RRD is now one that satisfies CRD Article 28(2) i.e. an IFPRU 730K firm.

An important objective of the RRD is for the FCA (or the PRA for dual-regulated firms) to be able to identify when a firm is in financial distress with a view to early intervention. With this in mind relevant investment firms will be required to prepare and submit recovery plans to the FCA. On the other hand a firm’s resolution plan will be drawn up by the Resolution Authority (RA) – CP14/15 confirms that the RA for the UK will be the Bank of England, or at least will sit within the Bank, based upon information provided by the firm. It is likely that the Bank will ask the FCA, on its behalf, to collect the required information. Note that the Consultation Paper concentrates upon the ‘recovery’ aspect rather than the ‘resolution’.

Once a ‘trigger’ is breached by a firm the FCA may intervene e.g. replacing the firm’s management or, if the firm is likely to fail, moving the firm into the resolution phase. In the latter case the RA may apply any resolution strategies necessary, including insolvency. Chapter 7 of CP14/15 consults on the metrics to be used to set appropriate ‘triggers’.

It is proposed to adopt proportionality and to apply simplified obligations, as allowed for under Article 4, to all but the largest firms; this would mean that of the approximately 230 FCA solo-regulated IFPRU 730K firms, around 190 firms would be subject to the ‘simplified application’ of the obligations. To identify ‘significant firms’, which will not be able to apply the simplified obligations but instead will be subject to the ‘general application’, it is proposed to use the same criteria as for the identification of significant IFPRU firms (IFPRU 1.2.3) which, in brief, would be a firm meeting any one or more of the following thresholds: total assets exceeding £530m; total liabilities exceeding £380m; client money or client assets in excess of £425m or £7.8bn respectively; or annual fees and commission income exceeding £160m.

Both general application and simplified applications firms will have to submit recovery plans to the FCA (annually or every two years respectively), although, as might be expected, the contents for the latter type of firm will be less onerous – see IFPRU 11.2.5 and IFPRU 11.2.6 as to content. Firms will need to establish ‘indicators’ which identify the points at which appropriate actions referred to in the recovery plan may be taken. When considering recovery plans, firms should also be aware of the EBA technical standards and guidelines relating to the information to be included (see link). It is proposed that the first reporting reference date (firms will have three months from that date to submit their plans) will range from 30 June 2015 to 30 June 2016 depending upon size – see SUP 16.20 in CP14/15.

The draft rules, including the reporting requirements in the amended SUP 16, can be found in Appendix 1 of CP14/15. As will be seen, the current IFPRU 2.5 will be deleted in its entirety and that a new chapter (chapter 11: Recovery and resolution) will contain the new obligations. Note that application of ‘recovery and resolution’ extends to financial institutions (which is not the same as an ‘institution’), financial holding companies etc. This is a complex area and firms should acquaint themselves with the list of firms in scope (see RRD Articles 1 and 2 which in turn refer the reader to the CRR 575/2013).

The consultation period ends 1 October with final rules expected in a December Policy Statement. The RRD has to be applied from 1 January 2015.

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