The impact of Brexit on “bail-inable” liabilities under English law

Abstract

Several years have passed since 29 March 2017, the date when the United Kingdom (UK) triggered Article 50 of the Treaty on European Union (TEU). This date has become well-known for paving the way to multiple legal and political issues, most of which depend on the agreement setting the conditions for the future relations between the European Union (EU) and the UK. In reference to the resolution of a credit institution established in the EU in a state of imminent crisis, Brexit might negatively affect its shareholders and bondholders who were called upon to contribute by absorbing losses and recapitalising the bank through the bail-in instrument. In particular, when the bail-in converts or writes down liabilities previously established under English law. To date, the EU legal framework for the resolution of credit institutions envisages a provision for the direct recognition of liabilities governed under any of the EU Member States’ law. This means that, due to Brexit, English law liabilities are no longer directly recognised at the EU level. However, the Bank Recovery and Resolution Directive (BRRD), one of the pillars of the EU legislation relating to resolution, leaves to each EU Member State the duty to require financial entities to include “resolution proof” clauses in the contracts establishing such liabilities or, alternatively, to conclude a binding agreement with the relevant third country. This creates issues concerning both the recognition of English law liabilities established pre-BRRD and to post-BRRD liabilities not compliant with the contractual requirement. By analysing the EU and UK legal frameworks, this paper aims to address possible solutions to ease a future resolution procedure involving the use of the bail-in instrument towards English law liabilities. The purpose is to ease both the determination of the Minimum Requirement for own fund and Eligible Liabilities (MREL) and the resolution process for the relevant authority in charge of the resolution procedure, since an orderly bail-in of those problematic liabilities could improve the effectiveness of the instrument and the success of the whole resolution procedure.