Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Government Consults on Transposition Measures for the EU Bank Creditor Hierarchy Directive
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  • UK Government Consults on Transposition Measures for the EU Bank Creditor Hierarchy Directive
    09/12/2018
    HM Treasury has published a consultation on the U.K. Government's proposed approach to implementing the EU Bank Creditor Hierarchy Directive (also known as the Insolvency Hierarchy Directive) into U.K. domestic law. Member states are required to transpose the BCHD into national law by December 29, 2018 and must apply the laws from the date of transposition.

    The BCHD is part of a package of reforms aimed at further strengthening the resilience of EU banks. It lays down harmonized rules for the insolvency ranking of unsecured debt instruments for the purposes of the EU recovery and resolution framework. The BCHD introduces statutory subordination across the EU, by amending the Bank Recovery and Resolution Directive so as to require Member States to create a new class of non-preferred senior debt in their creditor hierarchy. Instruments meeting the relevant criteria to fall within the new class will be eligible to meet subordination requirements under the provisions of the Total Loss Absorbing Capacity (TLAC) term sheet and its EU equivalent, the requirement for Minimum Requirement for Own Funds and Eligible Liabilities (MREL). HM Treasury explains in the consultation paper that the statutory subordination introduced by the BCHD will not prevent the U.K.'s preferred approach, which is to require structural subordination (i.e. subordination within the terms of capital instruments).

    The BCHD requires the new non-preferred senior class of debt to be provided for in normal insolvency proceedings. In the U.K., these proceedings are governed primarily by the Insolvency Act 1986, which, along with related legislation, was amended to transpose certain provisions of the BRRD. HM Treasury is proposing to make similar amendments to transpose the provisions of the BCHD. Non-preferential debt was not previously divided into classes, so the government proposes to sub-divide non-preferential debt into three classes: (i) "ordinary non-preferential debt", which will correspond with the non-preferential debt in the current regime; (ii) "secondary non-preferential debt", which will be the new class required by the BCHD and rank below ordinary non-preferential debt; and (iii)  additional Tier 1 and Tier 2 instruments and subordinated debt will rank below both ordinary and secondary non-preferential debt.

    The proposed amendments to the Insolvency Act 1986 are contained in a draft of the Banks and Building Societies (Priorities on Insolvency) Order 2018. HM Treasury seeks feedback on the general approach and on its potential impacts by October 10, 2018.

    View the Directive.

    View the consultation webpage.

    View the draft Order.

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