HMRC SDLT: SDLTM29210 – Reliefs: Financial Institutions in Resolution: Overview

Overview of Reliefs for Financial Institutions in Resolution

This section of the HMRC internal manual provides an overview of reliefs available to financial institutions undergoing resolution. It outlines the principles and concepts governing these reliefs, ensuring financial stability and continuity.

  • Reliefs are designed to support financial institutions during resolution processes.
  • Focus on maintaining financial stability and protecting public funds.
  • Guidance on eligibility and application of reliefs.
  • Ensures compliance with regulatory frameworks.

Overview of Reliefs for Financial Institutions in Resolution

The Special Resolution Regime

The special resolution regime, established under the Banking Act 2009, allows UK authorities to take action when a financial institution is facing failure. The key authorities involved in this process include:

Bank of England (BoE)
Financial Conduct Authority (FCA)
HM Treasury

This regime is designed to manage the situation effectively while minimizing disruption to the UK’s financial system and protecting taxpayers from potential losses.

What Constitutes a Financial Institution?

Under this regime, a ‘financial institution’ can include several types of entities, such as:

– Banks
– Companies that comprise a banking group
– Building societies
– Major investment firms
– Entities that are undergoing resolution actions in a third country
– UK branches of financial institutions from other countries
– Central counterparties

By including various types of institutions, the regime aims to maintain stability across a broad spectrum of financial services.

Aim of the Resolution Powers

The resolution powers granted to these authorities serve to:

– Prevent excessive disruption to essential economic functions provided by financial institutions
– Protect taxpayers from bearing the financial burden of a failing institution

Instead of allowing a failing institution to proceed to insolvency, these authorities can put the institution into a formal resolution process if certain criteria are met.

Conditions for Formal Resolution

For an institution to enter into resolution, the following conditions must be satisfied:

1. The institution is failing or likely to fail. This means that the financial position of the firm is deteriorating, and it is unable to meet its obligations.

2. No alternative actions will prevent failure. There must be no other reasonable means to address the institution’s issues that would allow it to continue operating without entering into resolution.

3. Entering resolution is necessary for the public interest. This underscores that the actions taken are in the best interest of the public, particularly in terms of maintaining stability in the economy and financial system.

When these conditions are confirmed, the institution has reached what is known as the Point of Non-Viability (PONV).

Losses and Shareholder Responsibilities

A critical principle of the resolution process is that losses are first absorbed by the shareholders of the failing institution. This means:

– All issued share capital can be cancelled or transferred away from the original owners.
– The principal value of debt instruments (including loan notes and bonds) may be reduced or written down.
– In some cases, these debt instruments can also be converted into shares.

This requirement is intended to ensure that those who have a financial stake in the institution contribute to the losses before public funds are considered.

Initiating the Resolution Process

The process of resolution can often happen quickly, typically announced over a weekend by the BoE. The Bank will declare that the failing institution has entered into resolution. This declaration will include:

– An outline of how the institution will be stabilised and revalued.
– The use of one or more stabilisation options, which will be governed by the resolution powers available to the authorities.

During this resolution period, the BoE may take several actions:

– Cancel some or all outstanding debt instruments.
– Transfer the institution’s issued share capital or its property, which may include assets like securities and land, to a private purchaser or a designated temporary holding bank appointed by the BoE.

Duration of Resolution

The time required for an institution to be stabilised and revalued can vary significantly and may take several months. The specific actions taken to exit the resolution process will depend on the nature of the stabilisation options that were implemented.

Information on Stabilisation Options

For more insights and details regarding the various stabilisation options available during the resolution process, further information can be found in SDLTM29240. This guidance outlines different methods that authorities can use to reinforce and secure the financial institution during periods of instability.

Importance of Public Interest

When considering a failing institution, the resolution process emphasises the need to act in the public interest. This includes maintaining public confidence in the financial system, ensuring critical financial services continue, and safeguarding the economy from potential shocks that could arise from the loss of a key financial institution.

Impact on Creditors

In addition to affecting shareholders, creditors of the institution can also face consequences during the resolution process. The writing down of debt instruments can have significant implications, as creditors may find themselves receiving less than what they are owed, or their payments could be converted into shares. This process aims to balance the need for stability with fairness to all parties involved.

Regulatory Oversight

The resolution actions taken by authorities are not unilateral; there is a regulatory framework that governs these processes. The BoE, FCA, and HM Treasury must adhere to specific regulations and guidelines as they manage a failing institution, ensuring that all actions are legally compliant and in line with the overall objectives of financial stability.

Examples of Resolution Actions

To illustrate how the resolution process works in practice, here are a couple of examples:

1. Example 1: A medium-sized bank shows signs of liquidity problems and is at risk of failing. The BoE assesses the situation, determines that no other actions would help the bank recover, and decides to place it into resolution. The BoE announces the bank’s entry into resolution, cancels its existing shares, and writes down some of its debts. These actions facilitate the sale of the bank to a stronger financial institution.

2. Example 2: A building society encounters significant financial distress due to a high level of non-performing loans. The authorities conclude that the building society is likely to fail and that actions short of resolution will not suffice. The BoE intervenes, places the building society into formal resolution, and transfers its valuable assets to a temporary holding bank, maintaining operational continuity until a permanent solution is found.

In both examples, the goal is to stabilize the financial institution while ensuring that the burden does not fall on taxpayers. Instead, shareholders and creditors share the risks involved.

Public Communication and Transparency

Clear communication is essential during the resolution process. The authorities must provide timely and accurate information to stakeholders, including shareholders, creditors, employees, and the general public. This transparency helps to maintain trust in the financial system, especially during uncertain times.

Post-Resolution Considerations

After a financial institution has successfully exited the resolution process, several considerations come into play. These include:

– Ongoing monitoring of the institution to ensure it remains stable and does not face further issues.
– Evaluating the impact of resolution measures on stakeholders.
– Reviewing the overall effectiveness of the resolution process to learn lessons for future incidents.

This reflects the authorities’ commitment not only to immediate recovery but also to long-term stability and resilience within the financial sector.

Useful article? You may find it helpful to read the original guidance here: HMRC SDLT: SDLTM29210 – Reliefs: Financial Institutions in Resolution: Overview

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