CPG 900 Resolution Planning

Resolution is the process of managing an APRA-regulated entity that has become non-viable, led by APRA as the resolution authority.[1] In this event, APRA’s objective is to protect depositors, insurance policyholders and superannuation fund members (beneficiaries), minimise disruption to the financial system and maintain critical functions (achieving an ‘orderly resolution’). Resolution plans set out the steps that APRA may take to resolve an entity in the event of non-viability.

For significant financial institutions (SFIs) and non-SFIs that provide critical functions, bespoke resolution planning can be required to remove barriers to resolution (see Figure 1). CPS 900 sets out a framework for resolution planning that will be implemented on an entity-by-entity basis.

The resolution plan is an important complement to an APRA-regulated entity’s recovery and exit plan, required under Prudential Standard CPS 190 Recovery and Exit Planning (CPS 190). Recovery and exit plans set out the steps an entity itself would take to manage periods of stress, including actions to restore financial resilience or exit regulated activity in an orderly manner. A strong recovery and exit plan would reduce the likelihood of resolution.

While there can be commonalities between exit planning and resolution planning, there are important differences, as shown in Figure 2 below.

The requirements in CPS 900 only become relevant to regulated entities when an entity is notified by APRA. Prior to this, there are no requirements under CPS 900 that entities need to meet. Entities are not required to prepare for CPS 900 implementation ahead of APRA’s notification.

There are six main components to the resolution planning process; the outcomes from each are set out in Table 1 below. Darker shading has been used to highlight key requirements of entities, and lighter shading represents actions taken by APRA.

The development of a bespoke resolution plan may occur over several years. APRA expects that the initial stages would be mainly focused on information gathering and assessment, providing for a gradual implementation of requirements under the standard.

The resolution planning process would typically involve frequent engagement between APRA staff and the regulated entity. APRA expects entities to be open, cooperative and constructive, and to provide all relevant information needed for informed assessments.

In some instances, addressing barriers to an effective resolution could have impacts for entities within a group that are not directly APRA-regulated, particularly where there are interlinkages across the group.

Where an entity has overseas operations, CPS 900 requires the entity to support the development and maintenance of cross-border components of a resolution plan. APRA may establish a working group to facilitate information sharing and cooperation with overseas regulators on cross-border components of the resolution plan.

Once an APRA-regulated entity has been subject to CPS 900, the Board of the entity must ensure that the entity meets the requirements of this Prudential Standard. In practice, this would mean that the entity is ready for the execution of the resolution plan (‘resolvable’). It would involve the Board overseeing the steps in preparing for resolution, including the implementation of pre-positioning actions and maintenance of capabilities necessary for resolution.

A prudent Board would ensure that the resolvability assessment and pre-positioning plan have been subject to rigorous review and challenge, including when these are updated over time. This could include an independent review, where considerations are complex or require specialist skills. In some circumstances, APRA may seek further assurance on the accuracy or completeness of an entity’s resolvability assessment, by requiring an independent review.

The early stages of bespoke resolution planning would typically involve APRA determining whether an entity provides critical functions. Critical functions refer to any functions that an individual entity provides that are important to financial system stability or the availability of essential financial services to a particular industry or community.[2] 

This is a foundational step in resolution planning; an orderly resolution would protect depositors, insurance policyholders and superannuation fund members, and avoid significant disruption to financial stability and the provision of critical functions.

Identifying critical functions is a complex judgement, which relies on a range of quantitative and qualitative information. To inform its determination, APRA may require entities to complete a critical functions analysis against key criteria. Good practice would be to provide supporting information to explain any justifications against the criteria, where appropriate.

Table 2 below sets out APRA’s key areas of focus in determining critical functions; this would form the basis of APRA’s information requests. Functions that do not have a material impact on financial stability, industries or communities, or those that can be substituted with a minimum of time and cost would be unlikely to be considered critical.

APRA’s approach to determining critical functions includes a focus on specific industry and community impacts. This is important since some industries or communities may be particularly reliant on the financial services of individual entities. For example, the non-viability of an insurer that provides public liability insurance could have significant industry impacts, if new construction projects were unable to proceed due to lack of insurance cover. In contrast, a small residential mortgage portfolio with a high degree of substitutability is unlikely to be considered a critical function.

Entities may also be required to identify any shared services that are vital to the provision of critical functions. In simple terms, these are services which, if they were to cease, would prevent an entity from providing its critical functions.[3] Where required, entities would be expected to undertake a comprehensive mapping of critical functions to shared services (provided within a regulated entity, from a group service provider or a third-party provider).[4] Some common examples of shared services include IT systems, legal services or administrative services.

Ahead of finalising its critical functions determination, APRA would communicate its findings to an entity. This provides an opportunity for entities to clarify conclusions or provide further information, where appropriate.

Under CPS 900, APRA would identify credible resolution options to support the orderly resolution of an entity. There are a range of potential options, depending on the industry an entity operates in and its particular risk characteristics. Some key examples are set out in Table 3 below.

Once APRA has identified potential resolution options, APRA would typically request an entity to assess their feasibility. This provides an opportunity for entities to provide feedback to APRA on the potential costs, risks and impacts of these options and associated pre-positioning measures. In requesting a resolvability assessment, APRA would typically provide a detailed outline of the key areas it expects entities to focus on.

APRA would typically provide an entity with 3-6 months to complete the resolvability assessment, although this may vary. APRA may hold several engagements with entities throughout this period to assess progress.

Barriers could arise from a range of sources, including contracts that do not allow for transferability of functions or prevent recapitalisation objectives; they could also be due to organisational structures that may not facilitate partial transfers. Some entities may encounter barriers due to a reliance on shared services and key staff, or a dependence on financial market infrastructure (FMI) service providers. Prudent entities would assess the risks associated with insufficient financial resources or a need for regulatory approvals or exemptions to execute the option.

It is important that the resolution option can be implemented in a timely manner. A prudent entity would assess the relevant steps needed to implement the option, clearly indicating where timeframes may be uncertain, including where there may be a reliance on external parties.

Execution risks could arise from a range of sources, including reliance on external parties or weaknesses in systems and processes for producing timely and accurate data, including for valuations. There could also be potential risks to the effective conversion or write-down of capital instruments.

Where barriers to implementation and execution risks have been assessed as low, and timelines for implementation are within acceptable ranges, APRA expects that pre-positioning measures would be fairly limited.

In other instances, entities will need to identify appropriate pre-positioning actions. An example may be where the resolvability assessment identifies certain clauses in contracts with third-party service providers that would inhibit access to these services in resolution. A prudent entity would clearly demonstrate how pre-positioning measures would mitigate the risks identified.

In assessing pre-positioning measures, an entity would identify the capabilities required to support APRA in effecting the resolution options. This might include systems and expertise needed to ensure operational continuity during resolution.

Using the findings from an entity’s resolvability assessment, APRA would then determine an entity’s bespoke resolution plan. The resolution plan sets out the steps that APRA may take to resolve the APRA-regulated entity, to protect beneficiaries and maintain the continuity of identified critical functions.

In determining the resolution plan, APRA will weigh up a range of considerations, such as implementation costs. APRA will seek to achieve its objectives – the financial safety of institutions and the stability of the Australian financial system – in a manner that balances efficiency, competition, contestability and competitive neutrality. APRA will also seek to leverage any work that has already be done to improve resolvability under an entity’s recovery and exit plan.

APRA-regulated entities will typically be required to develop and implement a pre-positioning plan for the measures identified in the resolvability assessment. APRA expects that these plans would set out clear timeframes and accountabilities for the completion of pre-positioning actions. Prudent entities would also set out the risks to effective implementation, making sure that appropriate mitigants are in place.

Renegotiation of contracts may be relevant for some entities. For example, some existing contracts may include termination clauses that could undermine the continued provision of critical functions in resolution. It is important that entities explore prudent ways of addressing these impediments to resolvability.

APRA will engage with entities regularly to assess progress in developing and implementing pre-positioning actions. Where APRA is not satisfied with the actions planned or taken, APRA may require additional pre-positioning actions to be taken.

APRA expects entities to maintain the financial resources required to support the resolution plan, including sufficient capital to absorb losses and liquidity to continue meeting financial obligations.

Under CPS 900 entities may be required to maintain additional loss-absorbing capacity for resolution. APRA’s objective is to ensure that, in the event of non-viability, financial resilience can be rebuilt and critical functions maintained, using private rather than public funds. Where entities are required to build additional loss-absorbing capacity, APRA will determine an appropriate timeframe for implementation, taking into account circumstances at the time. Additional loss-absorbing capacity requirements can be met with any form of regulatory capital.

Table 4 below sets out some example considerations for resolution capabilities.

Under CPS 900, APRA may require entities to engage an expert external advisor directly, or support external advisors engaged by APRA for the purposes of this Prudential Standard. External advisors can provide necessary skills and relevant specialist knowledge to assist in resolution planning.

Where APRA has required an entity to engage an expert external advisor, the entity must consult with APRA prior to finalising the terms of engagement. This provides an opportunity for APRA to assess the skills and relevant specialised knowledge of advisors, as well as any potential conflicts of interest. APRA will pay particular attention to the objectives, scope and format of a report, as well as the information that may need to be collected, and timelines for completion. APRA expects that expert external advisors will provide APRA with identical copies of any draft or interim report at the same time they are issued to the APRA-regulated entity.

APRA expects that entities will be open, cooperative and constructive in their engagements with external advisors, including with advisors engaged by APRA. It is important that advisors are provided access to relevant information, as appropriate.

It is important that the resolution plan remains effective and is updated, where appropriate. In addition to periodic reviews of the critical functions analysis and resolvability assessment, CPS 900 requires an entity to notify APRA of material changes to its business or operations that may create a barrier to resolution.

Strategic decisions can have significant impacts on the effectiveness of resolution planning. Decisions to enter new contracts, expand into new markets or restructure business lines may introduce new risks to the resolution plan, and prompt the need for additional pre-positioning actions. A prudent entity would engage with APRA prior to making changes to its business or operations where there are potential implications for resolvability.

Changes in the external environment can also impact a resolution plan. For example, legal or regulatory changes could have implications for the execution of the resolution plan, particularly where this involves changes to contracts. This risk could be more acute where entities have cross-border arrangements.

Reviews of the resolvability assessment may be undertaken by internal staff or external parties. Where internal staff conduct the review, a prudent entity would gain assurance that they are operationally independent and are able to provide an objective review, with the requisite skills, experience and expertise.