Scottish Financial Services. The new world of living wills. Ash Saluja 23 rd March 2010

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2 Scottish Financial Services The new world of living wills Ash Saluja 23 rd March 2010

3 Outline Key messages failure management Living wills under FSA RCPs RSPs The client assets/money storm The new client assets authority (CAA) and client assets trustee (CAT) Lessons from Lehmans FSA supervision/enforcement p3

4 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 a broad new regulatory focus across sectors Cross-party consensus despite huge costs p4

5 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 p5

6 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. 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 p6

7 Background - international Pilot with 30 odd institutions FSB/Basel - Working on cross border issues EU Crisis management Different insolvency and bank resolution laws Recent high level consultation Still thinking p7

8 Background international: problems still to be solved Cross-border entities Branch states versus home state Conflict Ring-fencing for local depositors Insolvency law International, group level co-ordination? Can this be done without agreement on burden sharing between states? p8

9 Living wills under FSA - recovery and resolution planning

10 Domestic UK regime FS Bill Broad powers for RRP rules HMT requirements on FSA FSA 4 banks in 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 p10

11 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? p11

12 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? p12

13 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 p13

14 RCPs who does what? The firm Owns Maintains Implements The authorities Review Require changes or external review Approve p14

15 RCPs - CoCos If CoCos could form a material part of recovery plans, the landscape might just be transformed Used by LBG To replace existing [impaired] hybrid capital Capital ratio trigger New capital raising before trigger reached? p15

16 Resolution plan (RSPs) (1) 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 p16

17 Resolution plan (RSPs) (2) Investment business Phase 1: internal action Phase 2: market facing action in preinsolvency corridor BIP Business Information Packs Data access Unplugging from the financial system Mapping Legal entity and group relationships What happens on failure Contingency arrangements p17

18 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 p18

19 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 p19

20 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 p20

21 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 p21

22 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 Is there an acceptable level of rescue risk/cost e.g. if it is supported by pre-funded levy scheme? p22

23 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 p23

24 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 p24

25 Maintaining RRPs Supported 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 p25

26 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 p26

27 Client money the growing storm

28 Lack of protection for client money 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 p28

29 Regulatory approach on client money FSA Dear CEO letter All sectors Compliance and responsibility FSA Enforcement Accountant/auditor failures p29

30 Regime change? New authorities The CAA (Client Assets Agency) The CAT (Client Assets Trustee) Client asset officers (CAO) single approved person responsible for CASS compliance and the trust estate? HMT post Lehmans consultation closed on 16 th March p30

31 What next? New rules increased Transparency and product warning Reporting, record keeping and audited disclosures FSA review Bankruptcy remote SPVs to hold assets Different client money pools and allocation of shortfalls p31

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