BoE proposes extra powers to restrict payments to CCP shareholders in stress conditions
03 August 2023 UK
Image: AdobeStock/Andronov/stock.adobe.com
The Bank of England has proposed an extension of its powers to restrict payments to central counterparty (CCP) shareholders or employees under stress conditions.
As part of its responsibility to preserve and strengthen financial stability in the UK, the Bank’s additional powers will allow it to restrict or suspend ‘discretionary payments’ to CCP shareholders or employees in severe circumstances. This will include dividends, share buy-backs, equity remuneration and some other remuneration benefits to senior managers such as bonuses, severance payments and discretionary pension benefits.
These additional powers are detailed under the Financial Services and Markets Act 2023. The Bank has issued a consultation paper which asks for industry comment on the circumstances in which these powers should be applied and its approach for doing so.
Schedule 11 of this Act addresses the application of a special resolution regime for CCPs and steps to ensure continuity of critical clearing services. These provisions, including the additional powers that will potentially be conferred on the Bank, aim to prevent risk contagion and to limit the need to call on public funds should a CCP fall into financial distress.
The Act was subject to HM Treasury consultation between February and May 2021 and was granted royal assent on 29 June 2023.
Sir John Cunliffe, deputy governor for financial stability, sent a ‘Dear CEO’ letter to UK financial infrastructure entities in June 2020 emphasising the need to consider additional financial and operational risks arising from Covid-19 when making discretionary payments to shareholders or employees.
This represented a call for CCPs and other infrastructure providers to retain funds —
that would otherwise have been paid out as dividends or other discretionary payments — to ensure they have the resources to maintain critical services, to withstand stress and to absorb potential losses.
The consultation period for the Bank’s proposals will close on 17 November 2023. It intends to publish its final statement of policy in Q1 2024.
As part of its responsibility to preserve and strengthen financial stability in the UK, the Bank’s additional powers will allow it to restrict or suspend ‘discretionary payments’ to CCP shareholders or employees in severe circumstances. This will include dividends, share buy-backs, equity remuneration and some other remuneration benefits to senior managers such as bonuses, severance payments and discretionary pension benefits.
These additional powers are detailed under the Financial Services and Markets Act 2023. The Bank has issued a consultation paper which asks for industry comment on the circumstances in which these powers should be applied and its approach for doing so.
Schedule 11 of this Act addresses the application of a special resolution regime for CCPs and steps to ensure continuity of critical clearing services. These provisions, including the additional powers that will potentially be conferred on the Bank, aim to prevent risk contagion and to limit the need to call on public funds should a CCP fall into financial distress.
The Act was subject to HM Treasury consultation between February and May 2021 and was granted royal assent on 29 June 2023.
Sir John Cunliffe, deputy governor for financial stability, sent a ‘Dear CEO’ letter to UK financial infrastructure entities in June 2020 emphasising the need to consider additional financial and operational risks arising from Covid-19 when making discretionary payments to shareholders or employees.
This represented a call for CCPs and other infrastructure providers to retain funds —
that would otherwise have been paid out as dividends or other discretionary payments — to ensure they have the resources to maintain critical services, to withstand stress and to absorb potential losses.
The consultation period for the Bank’s proposals will close on 17 November 2023. It intends to publish its final statement of policy in Q1 2024.
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