On 20 November 2019, the Financial Markets Law Committee (FMLC) published a letter, sent to HM Treasury, relating to Article 59 of the revised Bank Recovery and Resolution Directive (BRRD II). This provisions deals with the requirement to write down or convert capital instruments and eligible liabilities.
In the letter, the FMLC raises questions as regards the transposition status of BRRD II in the event of a no-deal Brexit and invites HM Treasury to discuss to what extent BRRD II will be transposed into UK law. The letter also underlines certain issues of legal uncertainty that the FMLC set out in a letter to the European Commission, which is attached to the letter.
These include the following:
- BRRD II expands the Article 59 power to include “eligible liabilities”. While it appears that the independent exercise of the Article 59 power under Article 59(l)(a) may only be exercised in relation to internally-issued minimum requirements for own funds and eligible liabilities (MREL), it is less clear whether the power may be used in relation to externally-issued MREL when used in combination with other resolution actions;
- expanding the scope of Article 59 calls into question the distinction between the mandatory conversion of capital instruments to use their loss absorbing capacity on the one hand, and the discretionary use of the bail-in resolution tool on the other, potentially in relation to a bank’s wider class of liabilities.
- some safeguards of the BRRD II do not appear to apply fully to eligible liabilities such as the “no creditor worse off” principle in Article 34 that is partially applied to the eligible liabilities that are written down or converted.
- the exercise of resolution powers are framed by some express safeguards that could be relied on in a public law challenge to a resolution authority, but these are not applicable to the exercise of the Article 59 powers.
The FMLC states that the uncertainty in scope and manner of application in relation to the newly expanded scope of Article 59 poses a risk that the Article 59 write down and conversion power will become a resolution-like power.