Effect of implementation of EU Bank Recovery and Resolution Directive on general securities
The UK's implementation of the EU Bank Recovery and Resolution Directive (BRRD), including bail-in and other resolution tools, came into force on 1 January 2015.
This was achieved primarily through changes to the UK Banking Act 2009 (the Banking Act) with certain provisions also being implemented by changes to the FCA and PRA Rulebooks. This means that the bail-in and other stabilisation tools and corresponding powers under the Banking Act special resolution regime (SRR), have been applicable to relevant entities from that date.
The implementation of the BRRD brings with it some important changes to the SRR in particular relating to the scope of entities caught by the regime. Key changes from a general securities perspective are set out below.
A bail-in tool has been added to the stabilisation options under the SRR. This will permit the UK authorities, in a resolution scenario to, among other things, cancel or modify contracts for the purposes of reducing or deferring liabilities of a relevant entity and/or to write down and/or convert liabilities of a relevant entity into different forms (eg equity). If applied, the bail-in tool would have a significant impact on, broadly speaking, all unsecured debt securities of a relevant entity.
Scope of entities caught by the SRR
The SRR applies to UK banks, building societies, investment firms, recognised central counterparties and banking group companies. The latter is defined very broadly to include, inter alia, a UK entity in the same group as a UK bank, building society, investment firm or in the same group as an EEA or third country credit institution or investment firm. In certain circumstances, the UK authorities may also elect to apply the SRR to a third country credit institution or investment firm which has operations or assets in the UK, in recognition and support of a resolution action against such third country credit institution or investment firm by the relevant third country resolution authority. For example, this may apply to a non-EEA bank issuer issuing through a London branch.
Mandatory write-down or conversion at the point of non-viability
This provides the UK authorities with the power to permanently write down or convert capital instruments, such as subordinated Tier 2 Notes, into equity at the point of non-viability before any resolution action is taken or in certain circumstances, in conjunction with a stabilisation tool. In other words, a stabilisation tool cannot be used before capital instruments have been written down and/or converted. Any equity issued to holders of affected notes may also be subject to bail-in.
Allen & Overy will continue to monitor this area, in particular with respect to any additional changes that may be made to the SRR as a result of any further developments at the EU or global level.