Approach to Bank Recovery and Resolution in the Isle of Man
The Bank (Recovery and Resolution) Act 2020 (“BRRA20”) came into operation on 4 January 2021.
BRRA20 gives the Isle of Man Financial Services Authority a new mandate as the Resolution Authority for the Isle of Man, in addition to its existing regulatory responsibilities.
The Act broadly reflects similar legislation that has been adopted in the UK and Europe and gives the Isle of Man Financial Services Authority a wide range of new powers to deal with a ‘failing or likely to fail’ bank.
In BRRA20 the Isle of Man Financial Services Authority’s two functions are separated into the Resolution Authority (‘Authority’) and the regulator (‘IOMFSA’). Due to the need to avoid conflicts of interest between these roles, a key item of legislation is the Bank (Recovery and Resolution) (Separation of Functions) Regulations 2020.
The Isle of Man’s resolution framework applies to all banks holding Class 1(1) and Class 1(2) permissions in the Isle of Man. It also applies to any company incorporated in the Isle of Man which is a holding company or subsidiary of such a bank.
The Bank (Recovery and Resolution) (Class 1(3)) Order 2020 excludes Class 1(3) licenceholders from the scope of BRRA20.
The resolution framework does not cover credit unions, building societies, or Class 1(3) bank representative offices.
The Bank (Recovery and Resolution) (Separation of Functions) Regulations 2020 established a Resolution Committee (“RESCO”) to support the Resolution Authority in discharging its responsibilities. These regulations require that the Resolution Authority’s functions must be performed in a manner that is operationally separate from those of the IOMFSA, so as to avoid conflicts of interest where possible.
Members of RESCO include one senior member of staff from the IOMFSA (in a non-supervisory role) and one from the Treasury, in addition to two Board members.
Best endeavours are made to avoid potential conflicts of interest arising as a result of other committee roles held by the members of RESCO.
RESCO meets at least three times each year to consider matters that fall within the remit of the Resolution Authority. Where functions under BRRA20 are reserved for the Board, RESCO will make recommendations in respect of such functions. However, certain functions are assigned or delegated by the Board to RESCO, to the Chief Executive, or to the Resolution and Deposit Compensation (“RDC”) team.
On a day to day basis, the Resolution Authority is staffed by the RDC team, who can be contacted via the switchboard of the IOMFSA.
Tel: +44 (0) 1624 646000
Separation of functions
The Resolution Authority is operationally independent from the supervisory function of the IOMFSA, with the day to day work of the Resolution Authority being undertaken by the Resolution and Deposit Compensation (“RDC”) team which reports directly to the Resolution Committee (“RESCO”).
The functions are separated to ensure that decisions made by the IOMFSA as regulatory supervisor do not constrain decisions made by the Resolution Authority, and vice versa.
A conflict of interest could arise if supervisory forbearance towards banks that are experiencing stress did not align with the objectives of the Resolution Authority. This is because the supervision function is expected to have a going-concern focus, and the Resolution Authority’s incentive is to maximise the gone-concern resources that would be available in resolution.
Regulations which set out how the Isle of Man Financial Services Authority must ensure the separation of its functions as the Resolution Authority from its functions as a regulatory supervisor, can be accessed here.
Interaction between the RDC team (IOMFSA as Resolution Authority) and BFIS (IOMFSA as supervisory authority)
The supervision of banks is undertaken by the Banking, Funds and Investments Division (“BFIS”) of the IOMFSA.
As part of its role as supervisor, BFIS collects data and information from the banks on supervisory matters on a regular and ongoing basis. To prevent duplication of work, there are information sharing arrangements between BFIS and the RDC team, which are set out in an internal memorandum of understanding.
Where information or data is required for resolution planning, but is not held by BFIS, the RDC team may reach out to request the information from banks directly.
One key learning from previous financial crises was the need for banks themselves to develop detailed plans as to how they would seek to recover from a stress event, or events, serious enough to threaten the viability of the bank. By considering these events in advance and documenting actions which bank management might take in response, the resilience of a bank to a potential ‘shock’ event may be improved.
Under BRRA20, the IOMFSA requires banks incorporated in the Isle of Man to prepare recovery plans and to keep them up to date. These recovery plans must also be submitted to the IOMFSA for review, normally on an annual basis. Guidance to assist banks in the preparation of their recovery plans is available here.
Where considered relevant, the IOMFSA will also obtain and review the recovery plans for banks that are incorporated in other jurisdictions and which have branch operations in the Isle of Man.
Banks incorporated in the Isle of Man
The Resolution Authority is required to draw up a resolution plan for each bank incorporated in the Island. The resolution plan must outline the actions which the Resolution Authority proposes to take, if the bank meets the resolution conditions. The approach is designed to be proportional, so that banks that could cause the greatest disruption if they failed in a disorderly way are subject to more extensive requirements.
The IOMFSA in its role as the Resolution Authority has delegated the task of preparing resolution plans to the staff of the Resolution and Deposit Compensation (“RDC”) team, subject to the approval of the Resolution Committee (“RESCO”).
The resolution plan will include a strategic business analysis, details of the preferred resolution strategy, the prerequisites for financial and operational continuity in resolution, the processes for obtaining information in a crisis, the communication strategy, and the conclusion of the resolvability assessment.
As part of the resolution planning process, the Resolution Authority may determine that preparatory measures should be put in place, and may direct the bank to take such measures.
The Resolution Authority may, on a case by case basis, set a minimum requirement for own funds and eligible liabilities (“MREL”) in respect of each bank incorporated in the Island. MREL is designed to provide for loss absorption in resolution.
The subject bank is entitled to provide its opinion on the resolution plan, so it will be provided with an overview of the plan. Any feedback from the bank forms part of the ongoing resolution planning process.
Resolution plans are reviewed and, where necessary, updated at least annually and after any material changes relating to the bank’s business in the Island.
Banks incorporated outside of the Isle of Man
Where a bank in the Island is a branch of a bank incorporated elsewhere, the Resolution Authority must discuss resolution plans with the home resolution authority and seek details of how the group plans impact the business in the Island.
A bank may be considered to have systemic importance if its failure would materially impact the Island’s economy.
The IOMFSA has categorised certain banks as ‘Domestic Systemically Important Banks’ (“D-SIBS”). Banks that have been categorised as a D-SIB have been notified of this by the IOMFSA, but the IOMFSA does not publish this list. The D-SIB assessment is performed by the supervision team (Banking, Funds and Investments Division).
In addition, the Isle of Man hosts certain banks that are part of groups designated internationally as ‘Global Systemically Important Banks’ (“G-SIBs”) or that are classified as D-SIBs in their home jurisdiction. A list of the G-SIBs is published by the Financial Stability Board.
In order to meet the resolution objectives, resolution plans must be proportionate to the systemic importance of the bank or group to which they relate.
Most banks would be put into insolvency if they failed, because this would not cause a major disruption to the financial system. BRRA20 includes a specific section dealing with bank insolvency.
The Isle of Man has a depositors’ compensation scheme (“DCS”) which will compensate eligible depositors if a Class 1(1) bank fails. Consumer material regarding banks can be found here.
However, due to the critical functions performed by some banks, the Resolution Authority may determine that entering the bank into the resolution process would better preserve financial stability. In such cases, the shareholders and certain creditors take losses, and more depositors may be protected under the “no creditor worse off” principle.
In a crisis, the Resolution Authority must determine whether a bank has “failed or is likely to fail”.
The Resolution Authority must then determine whether the resolution conditions have been met for that bank. If this is the case, the Resolution Authority may then take action using the appropriate stabilisation tools, in order to meet the resolution objectives.
The resolution conditions are:
- the bank is failing or is likely to fail;
- having regard to timing and other relevant circumstances, it is not reasonably likely that (ignoring the stabilisation powers) any action will be taken by or in respect of the bank that will prevent the failure or likely failure of the bank within a reasonable timeframe; and
- the use of the stabilisation tools is in the public interest of the Island.
If the resolution conditions have been met, the Resolution Authority must also communicate this to all relevant parties. The Resolution Authority will also consult with the Treasury.
Where a stabilisation power under BRRA20 has been exercised or the resolution conditions are met, normal insolvency proceedings may not be commenced except by, or with the consent of, the Resolution Authority.
If a bank is failing, and the resolution objectives would not be met by applying a stabilisation tool, the Resolution Authority may consent to the insolvency proceedings commencing.
The Resolution Committee (“RESCO”) will determine whether the resolution conditions have been met, and consider what options are available under BRRA20 to resolve the bank. Such options may be taken from the bank’s resolution plan, but the legislation permits the Resolution Authority to take other actions that are not recorded in the resolution plan, if this would achieve the resolution objectives more effectively.
RESCO will determine what tools are most appropriate to meet the resolution objectives.
“Stabilisation tools” are defined as follows:
- the sale of business tool;
- the bridge bank tool;
- the asset separation tool;
- the bail-in tool; and
- the government financial assistance tool.
Stabilisation tools will be effected by means of a resolution instrument. The outcome will be determined by the particular circumstances of the bank and the stabilisation tools employed.
It is anticipated that a resolution process would need to take place over a very short period of time e.g. over a weekend, in order for the ongoing critical functions of the bank to be maintained and operational on the following Monday morning.
Following the ‘resolution weekend’, further activities will take place to ensure that the tools are embedded, appropriate valuations have been performed and any assessments have been completed in a timely manner.
Relationship with other resolution authorities and regulators
The Isle of Man is an international finance centre, home to local banks and host to banks that are based in the UK or internationally, with clients all around the world.
Where a bank is part of a group that is based in another jurisdiction, the Resolution Authority will make efforts to reach joint decisions with the other resolution authority. For planning purposes, the Resolution Authority will seek agreement with other resolution authorities as to the scope of the respective resolution plans, to avoid overlapping plans which are inconsistent.
Where the group’s home jurisdiction does not have a resolution authority, the Resolution Authority will seek to exchange relevant information with the home regulator via the appropriate gateways
The ongoing administrative operations of the Resolution Authority, such as staffing, professional services, training expenses etc. are not included within the IOMFSA’s regulatory funding model.
The Resolution Authority calculates its operational costs on an annual basis, effective from the period 1 April 2021 to 31 March 2022. Recovery of the amount in arrears is sought by means of a levy on the banking industry. The levy is applied in an equal amount to each bank (Class 1(1) and Class 1(2)) in existence at the end of financial year, irrespective of the size or profitability of the bank concerned.
Should a resolution event take place, the Resolution Authority would need to call on additional resources, which would be funded separately. See the section headed ‘Bank resolution fund’
The Resolution Authority is empowered to establish a Bank Resolution Fund (“the Fund”) which may only be used to the extent necessary to ensure the effective application of the stabilisation tools, for the following purposes:
- to guarantee the assets or liabilities of the bank in resolution, its subsidiaries, a bridge bank, or an asset management vehicle;
- to purchase assets of the bank in resolution;
- to make contributions to a bridge bank or an asset management vehicle or, where the sale of business tool is applied, a purchaser;
- to pay compensation to shareholders or creditors in accordance with the general resolution principle under BRRA20 section 49(1)(g) and the resolution safeguards under sections 138 and 139;
- to make a contribution to the bank in resolution in lieu of the use of the write-down or conversion power, when the bail-in tool is applied and the Authority decides to exclude certain creditors from the scope of the bail-in tool in accordance with BRRA20 section 104; or to take any combination of the actions referred to in paragraphs (a) to (e).
The Fund may not be used to directly absorb the losses of a failed or failing bank or to recapitalise such a bank, unless such use is expressly provided for by any other enactment.
The following monies are to be paid into the Fund -
- money obtained by levying contributions from banks;
- money provided by the Treasury;
- money borrowed by the Authority for the purposes of the Fund;
- money received as income from investments;
- any other money required by BRRA20 (or any regulations made thereunder) to be paid into the Fund or received by the Authority in connection with a resolution action and determined by the Authority to be so paid.
The Fund must be controlled, managed and administered by the Resolution Authority, subject to the prior approval of the Isle of Man Treasury.
A Glossary for Bank Resolution can be found here.