Simon Lovegrove

On 15 July 2011, the European Banking Authority (EBA) published the results of its 2011 EU-wide stress test. The objective of the stress test was to assess the resilience of the EU banks involved against an adverse but plausible scenario. Its purpose was to provide an unprecedented level of transparency as to the sensitivities of the European banking sector to a general economic downturn and the impact of external variables, such as interest rates, economic growth and unemployment.

Some in the market criticised the stress test arguing that it contained a glaring omission by not looking at what would happen to the banks if there was a Greek sovereign debt default. Others dismissed this criticism on the basis that further analysis of Greek default scenarios would not serve any useful purpose. Notwithstanding these arguments the stress test appeared to be a fairly ambitious exercise involving 90 banks in 21 countries, 3,200 data points per bank with 10 pages of disclosures per bank.

Turning to the results of the stress test the key findings were that:

The results are a mixed bag but from a UK perspective the stress test did not really reveal anything new with the major UK banks appearing to be well ahead of the curve. Many have mentioned that the UK banks bigger concern is what they will have to put in the retail ring fence proposed by the Vickers’ interim report and the implications of having to hold the recommended Tier 1 capital cushion of 10 per cent which is well above the stress test scenarios.

Simon Lovegrove

On 25 February 2009, the High Level Group on Financial Supervision in the EU chaired by Jacques de Larosière published its report on the financial crisis. Chapter 4 of the report discussed global repair and began by stating that global economic and financial integration had now reached a level where no country or region could insulate itself from developments elsewhere in the world. This pointed to the need for a co-ordinated, global policy response not only in the area of financial regulation and supervision, but also in the macroeconomic and crisis management field.

Since of the publication of the de Larosière report there have been few successes regarding international agreement on regulatory issues (notably Basel III but see below). For example, Europe has been in negotiations with the United States for some time over the differences between the proposed European Market Infrastructure Regulation (EMIR) and the Dodd Frank Act. When EU Internal Market Commissioner Michel Barnier attended the Brookings Institute think-tank in Washington DC last June he warned that “incoherence and inconsistency between our [EU and US] rules will have negative consequences for our markets”.

However, the differences are not just isolated to instances involving the United States. For example, the European Commission has recently published its CRD IV package of proposals that are intended to implement the Basel III requirements. However, the proposals contain a number of additional requirements and the Commission has openly stated that Basel III is not law but “a configuration of an evolving set of internationally agreed standards that now need to fit in with existing EU (and national) laws and arrangements”.

Notwithstanding this the CRD IV package does, however, signal that Europe as a region is moving ever closer to having a unified set of regulatory rules. In June 2009 the European Council called for the establishment of a “European single rule book applicable to all financial institutions in the Single Market”. The purpose of the single rule book is to provide a single set of harmonised prudential rules which all institutions in the EU have to respect. The CRD IV package consists of a draft Directive and a draft Regulation. The draft Regulation is directly applicable and sets out, among other things, a single set of capital rules. I suspect in the coming months and years we will see the Commission use Regulations more and more.

It is also worth mentioning the new European Supervisory Authorities which came into force at the start of the year. One of these authorities, ESMA, already directly regulates credit rating agencies and it is expected that it will soon regulate trade repositories. ESMA also has a role in drafting EU legislation, in the form of technical standards and this will especially important with key pieces of EU legislation like EMIR, the MiFID and MAD reviews and the Alternative Investment Fund Managers Directive.

As noted by the de Larosière report developing consistent regulatory rules across a region like Europe will not solve the problem. A coordinated global policy response is needed. At its July meeting the Financial Stability Board agreed to develop a global framework for monitoring and evaluating the implementation of agreed financial reforms and international standards. It will be interesting to see how this framework develops and whether it will have any real impact. Something is clearly needed.

Lesley Harrold

The Pensions Regulator (TPR) has settled its dispute with the parent company of the Bonas Group Pension Scheme’s UK sponsoring employer for a fraction of the amount originally claimed.

In April 2010, the Determinations Panel of TPR recommended that a contribution notice (CN) should be issued for just over £5 million against Michel Van de Wiele NV (VDW), the Belgian parent company of Bonas UK Ltd. Bonas was the sponsoring employer of the scheme until being sold under a pre-pack administration, thereby causing the scheme to enter the Pension Protection Fund.

In the event, the CN was not issued as VDW applied to the Upper Tribunal and asked for the determination to be struck out. The strike-out application was unsuccessful, but in giving judgment, Mr Justice Warren suggested that the amount specified in the proposed CN was excessive. The amount specified should simply compensate the scheme for the detriment suffered following an act or failure to act that prevented the trustees from recovering an employer debt.

On 9 June 2011, TPR announced it had settled its dispute with VDW and that it had issued a CN in the amount of £60,000. TPR’s report confirms the compromise but largely rejects the tribunal’s analysis of the amount that should generally be specified in a CN. In particular, TPR’s report suggests that this is not how TPR intends to approach other current or future cases, and claims that the judge’s comments reflected the particular facts of the Bonas case and that they were not intended “…to restrict, in all cases, the amount of a CN to the detriment suffered by a pension scheme which could be demonstrated to be caused by the specified act or failure to act”.

However, our view is that even though Warren J’s comments on quantum were obiter dicta, they are a clear indication that the value of any future CN should be proportionate to the amount of any financial detriment suffered by the scheme. Any monies due under a CN should be compensatory and not punitive in nature.