Revocation of the on-shored UK Technical Standard (UKTS) 2019/348 on Simplified Obligations

Overview

This consultation paper (CP) sets out the Bank of England’s (the Bank’s) proposal to revoke the retained EU law Technical Standard 2019/348^{footnote [1]} on Simplified Obligations (SO UKTS).

Following the UK’s withdrawal from the European Union, the UK retained the EU Framework for determining the level of information required within recovery and resolution plans. This includes the process set down by the SO UKTS to determine whether ‘Simplified Obligations’ (SO) can be imposed in respect of such plans.

The Bank has found that the assessment prescribed in the SO UKTS identifies the same firms as the process that results in the setting of a preferred resolution strategy of modified insolvency. Accordingly, the Bank has determined it can achieve the same outcomes using this more efficient, existing process instead of the duplicative SO UKTS process. The ability to apply SO and any consequential benefits to firms from SO will not be affected by this proposal; the Bank only proposes to simplify the process whereby a firm is designated as eligible for SO.

The objective of this proposal is to reduce the resource burden of the prescriptive process upon the Bank, while preserving the application of SO and retaining the proportionality benefits for firms and authorities afforded by SO. Doing so will free up regulatory resource and enable better resource utilisation in other areas that require focus. There will be no impact on the firms within scope of the SO UKTS.

Consultation with other authorities

Resolution policy decisions aim, among other things, to reduce risks to public funds in the longer term. As a result, the Bank and HM Treasury work to ensure that risks to public funds are considered as part of policy development. The Bank has therefore consulted on the proposals in this CP with HM Treasury. The Bank has also consulted other relevant authorities namely, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

Firms in scope and approach to implementation

This CP is relevant to PRA-authorised UK banks, building societies, PRA-designated investment firms, their qualifying UK parent undertakings, and their subsidiaries (collectively, ‘firms’). The proposals are likely to be of particular interest to smaller and non-systemic firms that do not perform critical functions.

The proposal would result in the revocation of the SO UKTS by the Bank:

• Commission Delegated Regulation (EU) 2019/348 of 25 October 2018 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria for assessing the impact of an institution’s failure on financial markets, on other institutions and on funding conditions.

The draft technical standards can be found in Annex 1.

The Bank proposes to exercise its technical standards powers under section 138P FSMA^{footnote [2]} and in accordance with Articles 7(4A) and 8(3A) of the Bank Recovery and Resolution (No. 2) Order 2014/3348 (No. 2 Order).^{footnote [3]} For further details see the section on Statutory Obligations.

Following consideration of any response, the Bank will submit the proposed revocation of technical standards to HM Treasury for approval, in accordance with section 138R FSMA. Subject to approval by HM Treasury, the Bank intends to publish a notification that the SO UKTS has been revoked on its website on 30 April 2025.

The Bank proposes that the changes resulting from the proposals in this CP would come into force on 30 April 2025.

The proposal set out in this CP has been designed in the context of the UK having now left the European Union and the transition period having come to an end. Unless otherwise stated, any references to EU or EU-derived legislation in this CP refer to the version of the legislation that forms part of the retained EU law.

Questions for public consideration and comment

The Bank invites feedback on the proposals set out in this consultation by 2 February 2025. Please provide those responses by email to simplifiedobligationsCP@bankofengland.co.uk.

The Bank welcomes feedback on all the proposals in this consultation. Respondents may wish to include responses to the following questions:

1. Do you agree with the proposal to revoke the UKTS on SO?
2. Do you have any other comments on the proposal set out in this CP?

Background

Following the UK’s withdrawal from the European Union, the UK retained the EU Framework for determining the level of information required within recovery and resolution plans. This includes the process set down by Commission Delegated Regulation (EU) 2019/348 to determine whether SO can be imposed in respect of such plans. Under the Bank Recovery and Resolution No. 2 Order the Bank and the PRA may determine which firms are subject to SO. The process for this is separately prescribed through the SO UKTS. The Bank has the power to make, modify, amend, or revoke the SO UKTS and it must do so in accordance with the process set down in Chapter 2A Financial Services and Markets Act 2000 (FSMA).

The SO UKTS applies to the Bank in its capacity as UK resolution authority, the PRA as the competent authority for credit institutions and PRA-designated investment firms, and the FCA as the competent authority for investment firms. FCA solo-regulated investment firms are no longer in scope of resolution under the Banking Act 2009 and the No. 2 Order,^{footnote [4]} and therefore the SO UKTS is, in practice, no longer relevant to the FCA.

The SO UKTS requires the PRA and the Bank (as the competent and resolution authorities respectively) to carry out a granular quantitative and qualitative assessment at least every two years. The purpose of this is to identify those firms whose failure and subsequent winding up under normal insolvency proceedings would not be expected to have a significant negative effect on financial markets, on other institutions, on funding conditions, or on the wider economy, and therefore can be subject to SO. As resolution authority, the Bank has a separate statutory responsibility to identify a preferred resolution strategy and develop a resolution plan for all UK-incorporated banks and building societies (including subsidiaries of international groups).^{footnote [5]} The SO UKTS requires this assessment to be undertaken separately to the process for determining firms that can be subject to SO.

For recovery and resolution planning purposes, SO offer several proportionality benefits for firms and authorities. For recovery planning purposes, firms eligible for SO are only expected to include two, rather than three, recovery scenarios and are not expected to submit a recovery plan information template which is designed to consolidate a core set of recovery plan information and data for complex and lengthy recovery plans. For resolution planning purposes, firms eligible for SO are not required to submit detailed resolution planning templates and the Bank does not have to review firms’ resolution plans annually. The Bank wants to retain these proportionality benefits for eligible firms, and for itself. As such the ability to apply SO under the No. 2 Order will not be affected by this proposal; the Bank only proposes to simplify the process whereby a firm is designated as eligible for SO.

The Bank’s statutory obligations

The Bank has a statutory financial stability objective to protect and enhance the stability of the financial system of the UK.^{footnote [6]} This applies to the Bank generally including in relation to its role as the UK’s resolution authority.

Resolution planning

The Bank must prepare (and review on at least an annual basis) resolution plans for all institutions within scope of the special resolution regime.^{footnote [7]} The purpose of resolution planning is to develop a set of actions that could be taken by the Bank and relevant stakeholders (including other UK authorities and overseas authorities) if an institution fails. Resolution planning includes: (i) gathering information to facilitate resolution; (ii) conducting resolvability assessments; (iii) developing resolution strategies; and (iv) enhancing resolvability.^{footnote [8]} The No. 2 Order specifies the content of such resolution plans, with the ability for the Bank to determine less onerous obligations for resolution plans and resolvability assessments, and at intervals of more than a year, where SO apply.^{footnote [9]}

Recovery planning

The purpose of recovery planning is for firms to prepare for potential periods of stress and have strategies to stabilise their financial position and recover from financial losses. The No. 2 Order specifies the required content of recovery plans and provides for the PRA to determine less onerous obligations for recovery plans, where SO apply.

Proposal: resolution planning

The aim of the proposal in this CP is to retain the proportionality benefits offered by SO for eligible firms and the Bank, while removing unnecessary duplication from the process that is used to determine the firms that do not pose a systemic risk to the financial system. The ability to apply SO under the No. 2 Order will not be affected by this proposal.

The Bank has undertaken an internal review and found that the assessment prescribed in the SO UKTS identifies the same firms as the process the Bank follows to meet its statutory obligations, which results in the setting of a preferred resolution strategy of modified insolvency.

The Bank, as resolution authority, identifies a preferred resolution strategy and develops a resolution plan for all UK-incorporated banks and building societies (including subsidiaries of international groups).^{footnote [10]} This is done by assessing a range of quantitative and qualitative factors that enable the Bank to assess the risk a failure would pose to the special resolution objectives. Firms where the preferred resolution strategy envisages entering a modified insolvency regime (bank insolvency procedure (BIP), building society insolvency procedure (BSIP)) are expected to be able to do so without adversely affecting the achievement of the special resolution objectives. Firms with a preferred resolution strategy of modified insolvency are not deemed to be sufficiently significant such that their failure would be considered to pose a systemic risk to the financial system. They are therefore unlikely to justify the use of stabilisation tools.

The Bank deems that those firms which are set a preferred resolution strategy of modified insolvency should be subject to SO, given they do not pose a systemic risk to the financial system. Firms with a preferred resolution strategy involving stabilisation tools (eg, bail-in or transfer) are not currently eligible for SO and would not be expected to be in the future. Accordingly, the Bank has determined that it can achieve the same outcomes as per the SO UKTS process by using a more efficient, existing process around the setting of a preferred resolution strategy of modified insolvency instead of the duplicative SO UKTS process.

The Bank’s minimum requirement for own funds and eligible liabilities (MREL) statement of policy outlines key factors the Bank considers when determining a preferred resolution strategy.^{footnote [11] footnote [12]} This includes indicative thresholds that indicate a transfer or bail-in preferred resolution strategy may be appropriate. To support the Bank’s judgement on setting a preferred resolution strategy in a timely manner, the MREL statement of policy requires firms to inform the Bank if they are forecasting at any time that, in the following three years:

• their total assets will exceed £15 billion (paragraph 9.7); and/or
• they will exceed 40,000–80,000 transactional accounts (paragraph 9.10).

These indicative thresholds, among other information, will inform the Bank’s decision on whether to change a firm’s preferred resolution strategy. A change from modified insolvency may be required if stabilisation options would be needed to meet the Bank’s objectives. Where a firm’s preferred resolution strategy changes, the Bank will also reconsider the appropriateness of SO for that firm, but as set out earlier, our expectation is firms that do not have a preferred resolution strategy of modified insolvency would not be eligible for SO. Firms identified through the SO UKTS process, and those firms that are assigned a modified insolvency preferred resolution strategy through the processes used to set preferred resolution strategies, are not assessed at this point as posing a systemic risk to the financial system. Therefore, the two separate processes arrive at the same outcome.

The Bank’s advance notification requirement placed on firms via the MREL statement of policy provides assurance that the Bank can reach an appropriate determination of the preferred resolution strategy. As such, the Bank finds that the UKTS SO process is duplicative, in that it identifies the same population of firms as the process for assigning preferred resolution strategies and proposes that it be revoked.

Going forward, the population of firms which the Bank applies SO for the purposes of resolution planning would be those firms with a modified insolvency resolution strategy ie, BIP, BSIP.

At the point of failure, the choice of the actual resolution strategy might vary from the preferred resolution strategy adopted during resolution planning. In the event of an actual failure, the Bank will consider the circumstances of failure and if it is necessary, in the public interest and according to the Bank’s special resolution objectives, to execute the firm’s preferred resolution strategy or a different strategy.

Application of SO UKTS to the PRA and FCA

PRA

In addition to the Bank in its capacity as resolution authority, the SO UKTS applies to the PRA as the ‘competent’ authority for credit institutions and PRA-designated investment firms for the purposes of SO for recovery planning.

The PRA will continue to be able to apply SO for recovery planning under the No. 2 Order after the Bank’s proposals take effect.

As is currently the case,^{footnote [13]} global systemically important institutions and other systemically important institutions will continue not to be eligible for SO for recovery planning due to their systemic importance. Equally, a key determinant of eligibility for SO will continue to be whether a firm provides critical functions.^{footnote [14]} Those that do not would likely be eligible for SO.

While there are few foreseeable reasons why the Bank and PRA would make different SO determinations, the PRA retains its ability to do so. The PRA is reviewing its approach to the quantitative methodology as currently set out in the SO UKTS. Any changes in a firm's eligibility or in the PRA's approach to assessing SO eligibility in the future will be appropriately communicated by the PRA.

FCA

FCA-regulated investment firms are no longer in scope of resolution under the Banking Act 2009 and the No. 2 Order,^{footnote [15]} and therefore the SO UKTS is no longer relevant to the FCA.

Deletion of the technical standard

The Bank proposes to exercise its technical standards powers under section 138P Financial Services and Markets Act 2000 (FSMA) in accordance with Articles 7(4A) and 8(3A) of the No. 2 Order.

Pursuant to Article 7(4A) No. 2 Order the Bank may make technical standards specifying relevant criteria which the appropriate regulator must consider when exercising its functions under Article 7.

Pursuant to Article 8(3A) No. 2 Order the Bank may make technical standards specifying relevant criteria which it must consider when exercising its functions under Article 8.

Pursuant to section 138P(2)(b) FSMA, the Bank’s power to make technical standards includes the power to modify, amend or revoke any EU tertiary legislation made by an EU entity under the original EU power which forms part of retained EU law. The SO UKTS constitutes tertiary legislation for this purpose.

This proposal would be implemented as revocation of the on-shored UK technical standard SO UKTS. The SO UKTS has previously been amended by the Bank’s Technical Standards (Bank Recovery and Resolution) (Amendment etc) (EU Exit) (No. 3) Instrument 2020.

The Bank may make a standards instrument if it has been approved by HM Treasury. Before submitting a standards instrument to HM Treasury for approval, the Bank is required to publish a draft of the proposed technical standards accompanied by:

• a cost benefit analysis;
• an explanation of the Bank’s reasons for believing that making the proposed technical standards is compatible with the Bank’s financial stability objective; and
• an explanation of the purpose of the proposed technical standards.

The Bank is also required by the Equality Act 2010 to have due regard to the need to eliminate discrimination and to promote equality of opportunity in carrying out its policies, services, and functions.

The Bank must also consult with both the FCA and the PRA pursuant to section 138P(4) of FSMA ahead of making the standards instrument.

Cost benefit analysis

This section sets out a qualitative explanation of the costs and benefits of introducing the changes proposed in this CP. In line with its approach to other CPs with comparable impacts, the Bank has not included quantitative estimates for this proposal. This is because firms will not bear any costs as a result of these proposals, nor any reduction in the benefits they currently receive with regard to the proportionate application of recovery and resolution planning requirements. Therefore, the Bank considers that data collection to support quantitative analysis would not be proportionate.

Affected firms

PRA-authorised UK banks, building societies, PRA-designated investment firms, their qualifying UK parent undertakings and their subsidiaries (firms). The proposals are likely to be of particular interest to smaller and non-systemic firms that do not perform critical functions.

Benefits

The Bank as resolution authority will benefit from the changes proposed in this CP through removing duplicative internal processes. The Bank carries out the assessment prescribed in the SO UKTS using data firms already submit to meet regulatory reporting requirements. There will be no changes to the outcomes for the affected firm population or any consequential benefits they receive from SO for recovery and resolution planning.

Costs

There are no costs associated with the proposals contained in this CP.

Compatibility with the Bank’s objectives

The Bank considers that the proposal in this CP advances its objective to protect and enhance the stability of the financial system in the United Kingdom. The policy objective of the proposal is to reduce the resource burden of the prescriptive process upon the Bank, while preserving the application of SO and retaining the proportionality benefits for firms and authorities offered by SO. Doing so will free up regulatory resource and enable better resource utilisation in other areas that require focus.

The proposal in this CP will not adversely impact the Bank’s ability to:

1. Identify firms that are or may need to transition from modified insolvency to stabilisation powers in a timely manner; and
2. Comply with its statutory obligation under the No. 2 Order to ‘draw up and adopt a resolution plan for each relevant institution’ (Article 37(1)).

Equality and diversity

The Bank considers the proposals do not give rise to equality and diversity implications.

Annexes

• Annex 1: Summary of on-shored Bank technical standards 2019/348 (UKTS) requirements

  The SO UKTS requires competent and resolution authorities to carry out a detailed quantitative and qualitative assessment.

  Article 1 of the SO UKTS (together with Annex I and Annex III) relates to the quantitative assessment for credit institutions and directs competent and resolution authorities to assess the impact of the failure of a credit institution as detailed below.

  The quantitative criteria are assessed against a common threshold, in the form of a total quantitative score, calculated by accordance with a set of weighted indicators (listed in Table 1). To ensure a desirable balance in terms of the expected ratio of institutions ineligible/eligible for SO, the threshold for the total quantitative score for credit institutions should in principle be established at 25 basis points. An institution with a score equal to or higher than 25 basis points shall be regarded as an institution whose failure would likely have a significant negative effect on financial markets, other institutions, or funding conditions.

  The competent and resolution authorities may raise or lower the threshold within a range of 0 to 105 basis points, depending on the specificities of the UK’s banking sector. Competent and resolution authorities are required to keep the amended threshold under regular review. If the total assets of a credit institution do not exceed 0.02% of the total assets of all credit institutions authorised, authorities may conclude that the failure of a said firm would not likely have a significant negative effect.

  Article 2 relates to the qualitative assessment for credit institutions and directs competent and resolution authorities to assess those credit institutions that were not regarded as an ineligible for SO under the Article 1 qualitative assessment, against a set of qualitative considerations.

  The independent assessment performed by competent and resolution authorities should have regard to the objectives pursued by recovery and resolution planning. If a firm is unsuitable for SO on qualitative grounds, then full obligations will be applied.

  Table 1: Indicators and weights for calculating the total quantitative score for credit institutions ^(a)

  Criterion	Indicator for credit institutions	Weight
  Size	Total assets	25%
  Interconnectedness	Intra-financial system liabilities	8.33%
  	Intra-financial system assets	8.33%
  	Debt securities outstanding	8.33%
  Scope and complexity of activities	Value of over-the-counter derivatives (notional)	8.33%
  	Cross-jurisdictional liabilities	8.33%
  	Cross-jurisdictional claims	8.33%
  Nature of business	Private sector deposits from depositors in the UK	8.33%
  	Private sector loans to recipients in the UK	8.33%
  	Value of domestic payments	8.33%

  Footnotes

  • (a) Commission Delegated Regulation (EU) 2019/348 (Annex I).

  • The indicator value for each credit institution shall be divided by the aggregate amount of the corresponding indicator value for all credit institutions authorised in the United Kingdom and, where the relevant data are available, branches established in the United Kingdom.
  • The resulting ratios shall be multiplied by 10,000 to express the indicator scores in terms of basis points.
  • Each of the indicator scores (expressed in basis points) shall be multiplied by the weight assigned to each indicator as set out in Table 1.
  • The total quantitative score shall be the sum of all the weighted indicator scores.

• Annex 2: Draft Bank Resolution Standards Instrument: The Technical Standards (Simplified Obligations) Instrument 2023

  Powers exercised

  The Bank makes this instrument in exercise of the following powers and related provisions of the Act:

  • section 138P (Technical Standards)
  • section 138Q (Standards Instruments)
  • section 138S (Application of Chapters 1 and 2); and
  • section 137T (General Supplementary Powers).

  For the purposes of section 138P of the Act, the power to make technical standards which the Bank relies on for the purpose of this instrument is conferred on the Bank by Articles 7(4A) and 8(3A) Bank Recovery and Resolution (No. 2) Order 2014/3348.

  Pursuant to section 138P(2)(b) of the Act, the power to make technical standards includes the power to modify, amend or revoke any EU tertiary legislation made by an EU entity under the original EU power which forms part of retained EU law. Commission Delegated Regulation (EU) 2019/348 constitutes EU tertiary legislation (as defined in section 20 of the EUWA) for these purposes.

  The powers referred to above are specified for the purpose of section 138Q(2) of the Act.

  Pre-conditions to making

  The Bank has consulted the PRA and the FCA on this instrument pursuant to section 138P(4) of the Act.

  A draft of this instrument has been approved by the Treasury, as required by section 138R of the Act.

  In accordance with section 138J of the Act, read together with section 138S of the Act, the Bank published a draft of the proposed instrument and had regard to representations made.

  Interpretation

  In this instrument, any reference to any provision of direct EU legislation is a reference to it as it forms part of retained EU law.

  In this instrument:

  • ‘the Act’ means the Financial Services and Markets Act 2000
  • ‘Bank’ means the Bank of England
  • ‘EUWA’ means the European Union (Withdrawal) Act 2018
  • ‘FCA’ means the Financial Conduct Authority
  • ‘PRA’ means the Prudential Regulation Authority; and
  • ‘retained EU law’ has the meaning given it in section 6 EUWA.

  Revocation

  The Bank revokes Commission Delegated Regulation (EU) 2019/348.

  Commencement

  This instrument comes into force on [the day after the day on which it is made.]

  Citation

  This instrument may be cited as the Bank Resolution Standards Instrument: The Technical Standards (Simplified Obligation) Instrument 2023.

  By Order of the Bank of England

  [Insert date of final decision by the Bank of England.]