The Malta Financial Services Authority (“MFSA”) recently published a Circular regarding Directive 2014/59/EU (the “BRRD”) which establishes a framework for the recovery and resolution of credit institutions and investment firms (“institutions”). Such framework relates to crisis prevention, management and resolution of these entities. The provisions of the BRRD on recovery plans are highlighted by the MFSA, along with those related to the Banking Act and the Investment Services Rules for Investment Services Providers. Such provisions instruct every institution to have a recovery plan in place for the restoration of its financial situation following a significant deterioration, which is proportionate to their size, business model and interconnectedness.
The Circular explains that a recovery plan is put in place in order to identify the actions that can be available to counter any factors that could give rise to a crisis, and to examine the strength of such actions through a variety of different shocks to the system. Furthermore, the recovery actions shall be designed in such a manner that should they not be implemented in a timely manner, this could result in the failure of the institution. In this light, institutions are to prepare a recovery plan, setting out the actions which must be effected in order to restore their financial positions following a significant deterioration. A certain level of detail is expected, along with realistic assumptions and plausible actions to be taken by the management of the institutions once the conditions for early intervention are present.
The Guidelines and Technical Standards issued by the European Banking Authority (“EBA”) must be adhered to on drafting a recovery plan. The Circular provides the relevant links to the relevant Guidelines and Technical Standards, as follows:
1. EBA Guidelines on the minimum list of qualitative and quantitative recovery plan indicators [referred to in Article 9(2) of the BRRD];
2. EBA Guidelines on the range of scenarios to be used in recovery plans [referred to in Article 5(7) of the BRRD];
3. EBA Final Draft RTS on the content of recovery plans [referred to in Article 5(10) of the BRRD];
4. EBA Final Draft RTS on the assessment of recovery plans [referred to in Article 6(8) of the BRRD].
Some of these documents are in draft format, however the principles contained therein are applicable.
The MFSA are allowing up to the 31st December 2015 for institutions to provide them with a provisional recovery plan for their review, in line with the guidelines as provided above. The MFSA expect such recovery plans to meet the criteria laid down in the BRRD and must be satisfied in this respect. In the context of their review of such recovery plans, the following factors will be taken into consideration by the MFSA:
the nature of the institution’s business, its shareholding structure, legal form, risk profile, size, legal status and interconnectedness to other institutions or to the financial system in general, the scope and complexity of its activities, whether it is a member of an institutional protection scheme or other cooperative mutual solidarity systems, whether it exercises any investment services or activities, and whether its failure and subsequent winding up under normal insolvency proceedings would be likely to have a significant negative effect on financial markets, on other institutions, on funding conditions, or on the wider economy.
Further to the above, the MFSA recently issued an additional Circular on the subject, specifically to Category 3 Investment Firms. A copy of such circular is available here.