In March we reported that the Prudential Regulation Authority (PRA) in the UK had published a Consultation Paper proposing amendments to the rules regarding contractual recognition of bail-in clauses in contracts governed by non-EEA laws.
To recap (see our earlier blogs here and here), under Article 55 of the Banking Recovery and Resolution Directive (BRRD), 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 BRRD.
The scope of the existing PRA rules on contractual recognition (which implement Article 55 BRRD into UK law) is broad and in some circumstances, particularly in the trade finance context, compliance with the rules may be impracticable. To address the concerns of market participants, the PRA is now amending those rules so that UK financial institutions are not required to include contractual recognition language in respect of certain liabilities where to do so would be impracticable. The PRA has also published a supervisory statement which provides a non-exhaustive list of grounds on which a UK financial institution might decide that such an inclusion is impracticable. These grounds 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 amendments come into effect on 1 August 2016.
The amendments to the rules are welcome but, for many market participants, they do not adequately address some of the concerns arising from the scope of Article 55 BRRD, for example, the very broad meaning of “liabilities” in respect of which the rules apply (and which make its scope potentially extremely wide) and the potential for the rules to be applied differently by different financial institutions in different jurisdictions.
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.