LMA clarifications for changes to the Bail-in clause


10th June 2021

Under the Bank Resolution and Recovery Directive (EU Directive 2014/59) (BRRD), where an EEA regulated institution enters into a financial contract governed by the law of a non EEA state, "Bail-in" provisions must be included in the document permitting the execute by EEA regulators to exercise certain powers in the case of the insolvency of that institution.

Following the end of the Brexit transition period on 31 December 2020, the United Kingdom will be considered as a non-EEA country, and Bail-in clauses need to be reviewed in a different light. The Loan Market Association (LMA) has updated its specimen Bail-in Clause and guidance to reflect the new position.

Overview of the Bank Resolution and Recovery Directive

The Bank Resolution and Recovery Directive (EU Directive 2014/59) (BRRD) contains wide ranging recovery and resolution powers for EEA regulators to facilitate the rescue of a failing EEA financial institution. The EEA consists of members states of the European Union, Iceland, Liechtenstein and Norway. The powers include the ability for a regulator (amongst others) to write down the liabilities of a failing financial institution and/or to convert such liabilities into equity (Write Down and Conversion Powers). A regulator’s exercise of the Write Down and Conversion Powers will be effective in respect of any liabilities under a document governed by the law of an EEA country regardless of the term of that document.

Article 55 of the BRRD

  1. Article 55 of the BRRD address documents which are governed by the law of a non-EEA country and requires EEA financial institutions to include a “Bail-in Clause” in such documents that they are party to (the Bail-in Clause) (Article 55 Requirements)
  2. By including a Bail-in Power in such documents, the financial institution’s counterparty acknowledges/agree that the financial institution’s obligations are subject to the Write Down and Conversion Powers. By including a Bail-in Clause, it is thought that any exercise of any Write Down and Conversion Powers will be less susceptible to a challenge by the counterparty if the counterparty had expressly agreed to the potential exercise of those powers.

When will a Bail-in Clause need to be included pursuant to Article 55 of the BRRD?

A Bail-in Clause will need to be included in a document if:

  1. The document is governed by the law of a non-EEA country. Following the end of the Brexit transition period on 31 December 2020, the United Kingdom will be considered as a non-EEA country.
  2. The EEA financial institution has any potential liability (contractual or non-contractual) under the document.
  3.  Either:
    • The EEA financial institution becomes a party to a document on or after 1 January 2016. This will also include loan transfers completed on or after 1 January 2016 irrespective of the date of the underlying facility agreement; or
    • Material amendments are made to a document to which an EEA financial institution is a party on or after 1 January 2016 (irrespective of when the document was originally entered into). Material amendment is widely defined as “an amendment affecting the substantive rights and obligations of a party.” The amendment does not have to affect the financial institution’s liabilities under that document (i.e. increase/decrease of liabilities). Whether an amendment is ‘material’ a question of fact in each case; or
    • New liabilities arising on or after 1 January 2016 under an existing document to which an EEA financial institution is a party.

Mandatory features of a Bail-in Clause

Each Bail-in Clause must contain the following:

  1. A description of the Write Down and Conversion Powers as set out in the applicable national implementing legislation.
  2. Acknowledgment and acceptance by the financial institution’s counterparty that:
    • the financial institution’s liabilities may be subject to the exercise of Write Down and Conversion Powers by the relevant regulator;
    • the counterparty is bound by the effect of a regulator’s application of those Write Down Powers and Conversion Powers including (i) any reduction in the principal amount or outstanding amount due; and (ii) conversion of the relevant liability to equity;
    • the terms of the relevant document may be varied to give effect to the Write Down and Conversion Powers;
    • equity may be issued to the counterparty;
    • the Bail-in Clause is exhaustive and will supersede any other term or agreement

Effect of the UK's withdrawal from the United Kingdom

  1. The Brexit transition period ended on 31 December 2020. As such, English law documentation are within the scope of Article 55 of the BRRD and a Bail-in Clause will need to be included in the circumstances described above.
  2. UK financial institutions will need to include a Bail-in Clause in the following:
    • documents governed by the law of any EEA member state entered into or materially amended after 31 December 2020; or
    • documents governed by the law of any non-EEA country (other than the UK).

Amendments to the recommended form of Bail-in Clause with effect from 15 April 2021 (for use in the UK)

  1. The LMA published the latest form of the LMA Bail-in Clause in the document titled “The LMA Recommended Form of Bail-in Clause and Users Guide” on 15 April 2021.
  2. The following points should be noted in relation to the recommended form:
    • It will apply to all liabilities under all ‘Finance Documents’.
    • It will apply to all parties and is not confined to just the finance parties.

Paragraph (c) of the definitions of the “Bail-in Legislation” and “Write Down and Conversion Powers” captures future bail in legislation. This is optional and not a requirement to comply with the Article 55 Requirement.

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