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Recognition of EEA bail-in rights in Africa – amendment to UK rules

Claire Edwards
Andrew Wood

Good news for UK financial institutions doing business in Africa under local law contracts. The Prudential Regulation Authority (PRA) in the UK has published a new Consultation Paper suggesting some amendments to the rules regarding contractual recognition of bail-in clauses in contracts governed by non-EEA laws. That paper can be seen here.

By way of recap (see our earlier blog), EEA financial institutions (and their overseas branches) must include a clause in their non-EEA law governed loan agreements, trade finance instruments and other agreements under which they have a payment or other liability specifying that those liabilities may be subject to bail-in by EEA regulators under the Banking Recovery and Resolution Directive (BRRD). 

The scope of the existing PRA rules on contractual recognition is broad and in some circumstances, particularly in the trade finance context, compliance with the rules by UK financial institutions may be impracticable.  To address the concerns of market participants, the PRA published a modification by consent earlier this year which UK financial institutions could apply for, which provides that the contractual recognition of bail-in rule will not apply in respect of a “phase two liability” where it would be impracticable for the relevant UK financial institution to comply in respect of that liability. The modification expires on 30 June 2016 and the PRA proposes that the amended rules will apply from 1 July 2016.

The main suggested amendment to the PRA rules is that UK financial institutions must include contractual recognition language into phase 2 liabilities (i.e. unsecured liabilities of UK financial institutions which are not debt instruments) unless this is impracticable.  The PRA also sets out in a draft supervisory statement (in Appendix 2 of the Consultation Paper) its expectations that relevant UK financial institutions will make a reasoned assessment as to whether the inclusion of contractual recognition language in the terms of a given phase 2 liability is impracticable and helpfully provides a non-exhaustive list of grounds on which a UK financial institution might decide that such an inclusion is impracticable.  They include:

  • if a relevant third-country authority has informed the relevant financial institution that they would not allow the inclusion of such language or local laws would not permit it;
  • if the creation of liabilities is governed by international protocols, which the relevant financial institution has no power to amend; and
  • if the liability which would be subject to the contractual recognition requirement is contingent on a breach of the contract.

The Consultation Paper commentary provides that “the impracticability consideration could …apply to liabilities used for the purposes of trade finance.  Such liabilities often fall under standard international documentation and may not be practicably amendable by [UK financial institutions]”. 

This development will, no doubt, be welcomed by UK financial institutions, particularly those active in the trade finance market in Africa. 

The consultation is open until 16 May 2016.

For more details on contractual recognition of bail-in under the BRRD and the particular questions this poses for sectors like trade finance in Africa, have a look at our more detailed article here

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