By James Hamilton, J.D., LL.M.
A bill overhauling UK regulation of financial institutions may offer a preview of what US reform legislation may look like. The UK reform bill would, for the first time, establish a permanent special resolution regime, providing the Financial Services Authority with tools to deal with institutions that get into financial difficulties. The bill is heavily based on managing risk, with in-built statutory triggers for regulatory involvement by the Financial Services Authority. The bill embodies the concept of ``heightened supervision’’ under which regulation will intensify concomitant with an increase of risk to the financial institution. The UK does not currently have a permanent statutory regime for dealing with failing financial firms.
Heightened supervision is not a separate supervisory regime or set of powers, explained FSA CEO Hector Sants, but the bill would give the FSA a range of tools, called stabilization options, to mitigate risks when an increase in risk occurs. For example, the FSA could direct transfers of a firm’s business to a private sector purchaser, temporarily to a government-controlled bridge bank, or place a financial institution into temporary public ownership. This could happen upon the triggering of a threshold condition, such as a determination that a firm is failing its regulatory duties and that it is not reasonably likely that the financial institution can bring itself back into compliance. In making this determination, the FSA must discount any financial assistance provided by the government.
Upon a triggering condition, a firm can be placed into a special resolution regime, allowing the FSA to intervene when a bank gets into severe difficulties, including the introduction of an insolvency regime. Upon the financial institution being placed into a special resolution regime, the three stabilization options listed above kick in, and are exercised through what the bill calls stabilization powers, which are the powers to effect the transfer of shares and other securities by operation of law. Once a firm is placed into the resolution regime, assured CEO Sants, the FSA will continue to supervise it in its usual risk-based way.
In a sense, said the FSA CEO, the bill ensures FSA regulation by recognizing the importance of a single regulator making the judgment of whether a financial institution is a going concern. The measure also requires the Treasury, after consulting with the FSA, to issue a code of practice about the use of the stabilization powers
There are two alternative conditions to taking a firm into temporary public ownership. The first is that public ownership is needed to reduce a serious threat to the financial system. The second is that the public interest must be protected when the government has provided assistance to the financial institution. A transfer to temporary public ownership may only be effected through a transfer of shares and securities. Thus, the bill broadly defines securities to include shares and stock; debentures; warrants or other instruments that entitle the holder to acquire such securities.