The PRA has published Consultation Paper 8/16: The contractual recognition of bail-in: amendments to PRA rules (CP8/16). In CP8/16 the PRA puts forward proposals to amend the Contractual Recognition of Bail-In Part of the PRA Rulebook, along with a draft supervisory statement reflecting the PRA’s expectations. The PRA states that its proposals are consistent with the modification by consent published in November 2015.

The PRA’s current rules on contractual recognition require firms within the scope of the Bank Recovery and Resolution Directive (BRRD) to include in non-EU law contracts governing liabilities a term by which the creditor recognises that the liability may be bailed in by the Bank of England as the resolution authority. The rules implement Article 55 of the BRRD.

The PRA states that the scope of its current rules on contractual recognition are broad and there may be circumstances where BRRD firms find compliance with the requirement impractical. To address concerns, the PRA published a modification by consent which dis-applies the rules for a subset of liabilities where compliance is impracticable and where BRRD firms have notified the PRA that they consent to modification. The modification expires on 30 June 2016 and CP8/16 proposes an amendment to the PRA rules to the same effect as the modification.

The PRA also puts forward three additional technical amendments to its rules to ensure consistency between them and the final draft European Banking Authority regulatory technical standards (RTS) on the contractual recognition of bail-in due to be addressed shortly by the European Commission. The proposed amendments are set out in chapter 3 of CP8/16 and are:

  • the inclusion of contractual recognition language into contracts for liabilities which are not fully secured and for secured liabilities which are not under a continuous full collateralisation requirement in accordance with EU or equivalent third-country law;
  • the inclusion of contractual recognition language into liabilities created before the date of application of the contractual recognition requirement if the agreement governing the liability is subject to a material amendment after 30 June 2016; and
  • the replacement of the reference to liabilities ‘arising’ after a certain date in PRA rules with a reference to liabilities ‘created’ after that date. The amendment intends to ensure consistency with the draft RTS and provide greater clarity as to which liabilities are in scope of the contractual recognition requirement.

Chapter 4 of CP8/16 considers the PRA’s approach to supervision in relation to the contractual recognition requirement. The PRA states, among other things, that it will supervise and enforce the contractual recognition requirement in a proportionate, judgement-based and risk-based manner, as it does with other requirements, and as set out in its approach documents to banking supervision and enforcement. The PRA and Bank of England will also discuss with BRRD firms progress on the inclusion of the contractual recognition language as part of the regular update of firm resolution plans.

The deadline for comments on CP8/16 is 16 May 2016. The amended rules are proposed to enter into force on 1 July 2016.

View The contractual recognition of bail-in: amendments to the PRA rules – CP8/16, 15 March 2016