FSB Publishes Guidance on Resolution of Non-Bank Financial Institutions and Systemically Important Insurers

The Financial Stability Board (“FSB”) reissued the Key Attributes of Effective Resolution Regimes for Financial Institutions (“Key Attributes Document”), incorporating additional guidance on the FSB’s application to non-bank financial institutions and on arrangements for information sharing.

The Key Attributes Document was adopted by the FSB in October 2011, and set out twelve essential features that should be part of the resolution regimes of all jurisdictions. The 2014 version of the Key Attributes Document incorporates additional guidance that elaborates on information sharing for resolution purposes and sector-specific guidance for insurers, financial market infrastructures, and the protection of client assets in resolution.

The newly adopted guidance documents have been incorporated as annexes into the 2014 version of the Key Attributes Document. No changes were made to the twelve key attributes of October 2011, which the FSB stated “remain the umbrella standard for resolution regimes covering financial institutions of all types…”

The FSB addressed further guidance for the identification of the critical functions and critical shared services for systemically important insurers. This guidance “should assist national authorities in implementing the recovery and resolution planning requirements set out in the [Key Attributes Document] and in the policy measures of the International Association of Insurance Supervisors (IAIS) for globally systemically important insurers (G-SIIs).”

Comments and responses to questions set out in the consultative document should be submitted by December 15, 2014.

Lofchie Comment: The report raises serious questions about the extent of government discretion in the event of major institution failure. Under the report, the authority of the government to exercise discretion potentially begins with the point in time at which the government decides that it is free to act. In this regard, the report (at page 6) says that “Resolution [by the government] should be initiated when a firm is no longer viable or likely to be no longer viable, and has no reasonable prospect of becoming so. . . ” [Emphasis supplied.] This is inherently a judgment call. In exercising such discretionary authority, the report says that “The resolution authority and its staff should be protected against liability for action taken and omissions in good faith . . . ” That is, the resolution authority would be protected even if its actions did not have a reasonable basis, so long as they were sincere in their decision-making. Proving insincerity is a difficult task.

It should be a concern to all that the government seems to be moving so steadily and in so many areas to resolution regimes where final decisions are discretionary, rather than rule-based.

See: Key Attributes of Effective Resolution Regimes for Financial Institutions; FSB Press Release for Key Attributes Document; FSB Press Release for Consultation on G-SII Guidance.