Staying Alive or a Tragedy? Consultations on operational continuity in resolution policy for UK financial institutions

It’s fair to say that 2020 has been an incredibly challenging time for UK financial institutions. Banks have to be more resilient than ever, as they face supposed “once in a generation” challenges resulting from Brexit uncertainties and pressures resulting from Covid-19 on their workforce, on their customers and on their operations. Although this landscape presents opportunities for some institutions and the sector has generally survived the initial shock of the pandemic fairly well, 2020 has sharpened the focus of authorities on potential failures and how they might best prepare for the resolution of a significant financial institution. As a result, the Bank of England and the Prudential Regulation Authority (PRA) are consulting on a package of proposals relating to operational continuity in resolution (OCIR) policy – the deadline for responses is 31 January 2021.  

What is OCIR and why is it important?

“Operational continuity” refers to the means of ensuring or supporting continuity of the critical shared services that are necessary to maintain the provision or facilitate the orderly wind down of a firm’s critical functions in resolution.

Financial institutions are required to prepare for resolution so that, if the need arises, it can be resolved i.e., it can fail in an orderly manner with minimum disruption to the critical functions provided by that institution that are vital for the functioning of the real economy. Failure of these critical functions would lead to the disruption of services and risk threatening financial stability. The process of resolution can extend for many months or longer.    

A successful resolution requires ensuring that the critical shared services (such as IT infrastructure and software-related services, HR support and transaction processing) that support a firm’s critical functions will continue to be provided throughout the resolution period.

OCIR has been a priority for the Bank of England and the PRA for some time, with the Bank setting out its approach as part of its statement of policy on assessing the resolvability of individual firms. 

More than a (Critical) Function

The original approach to operational continuity has evolved.

Whereas the focus of the OCIR policy was firmly on keeping the identified critical functions (and supporting services) of the firm going throughout a resolution process, the Bank of England now considers that it is important to ensure that the firm can continue to operate other business lines (“core business lines”) throughout the resolution period and any subsequent restructuring, to support the franchise and the future viability of the firm. “Core business lines” are services that represent a material source of revenue, profit or franchise value for the firm itself or its group.  Retaining customer levels and customer confidence is key to minimise disruption.

The PRA, as the lead regulator for UK banks, building societies and PRA-designated investment firms, is proposing to revise its OCIR policy to adapt to this shift in focus. The PRA proposes to apply the existing OCIR concepts that apply to a firm’s critical services to those services that are necessary to ensure the continuity of core business lines during a resolution.

 Proposed changes to its policy will mean that firms are required to:

• consider their operational arrangements more broadly;
• identify key drivers of revenue and profit; and
• ensure that their financial arrangements support continuity during resolution and restructuring. 

For example, firms will be required to monitor and maintain early warning indicators and undertake scenario analysis to identify risks to the financial resilience.  Intra-group service providers will be required to maintain resources of a minimum of 1/6th of the annual fixed overheads of critical and essential services provision for use in a resolution.  

The Bank of England is proposing to make amendments to its “Statement of Policy: The Bank of England’s Approach to Assessing Resolvability” to, amongst other things, align its stated approach with the new requirements set out in the PRA consultation paper. These focus on ensuring that essential services can continue during a resolution (and subsequent restructuring) and provide insight to how the Bank of England will consider firms’ implementation of the OCIR policy.  

Only time will tell whether the proposals go far enough to ensure that a successful resolution can be achieved in practice, but they should help to keep any disruption to the core business of the institution to a minimum during the resolution period.