Response to consultation on draft Regulatory Technical Standards on valuation
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General There are 3 questions on which the consultation and draft Delegated Regulation are silent, which are of considerable legal and practical importance:
1) It is not clear what happens if the ex post valuation shows that the resolution was either not well founded because it transpires the resolution threshold were not in fact satisfied or on terms which were inappropriate because they were more extensive than required? Is there any remedy available and if so what is it?
2) It is unclear what happens if because of poor record keeping, processing error or misunderstanding by the valuer, any particular liability or asset (or class of liability or assets) is omitted from the valuation process altogether, is wholly or partially omitted in the assignment of equity to a creditor, or class of creditor, or is under or overvalued. This sort of error could significantly affect the amount of equity issued to a creditor or class of creditor, so treating them unfairly in relation to other creditors whose rights have been correctly valued. This is not a process in which NCWO will assist in giving a correct result (e.g. because it may have been determined that the creditor would have received nothing or less in an insolvency than the value of the equity that was actually issued to him, although this is less than the equity that should have been issued to him if his claim had been correctly assessed and valued for the bail-in conversion process). It seems to us that there needs to be a process to enable affected bailed-in creditors to make good their entitlement to a higher amount of the new equity (and for over-entitlements to be clawed back). At present there is no such process and one needs to be provided to prevent the legislation failing to meet basic standards in the protection of property rights. It may be that arbitration processes would be cheaper and speedier for resolving such disputes than leaving all issues to be determined by the courts and we consider that thought could usefully be given to setting up such a process.
3) NCWO applies without a de minimis and it will often be the case that ordinary creditors would always have received something on an insolvency. Therefore in any case where the new equity proves to be of little or no value, there could be a very large number of claims if ordinary creditors have been bailed-in (in addition to those holding bailable instruments). The methodologies in the draft Delegated Regulation for determining the NCWO claims are much to brief to give any degree of predictability to the determination. It seems to us that the draft Delegated Regulation underestimates the difficulty of valuing the new equity (which is unlikely immediately to be quoted, as all the previous equity will have been written off and the financial outlook for the continuing or bridge bank/parent company in which the equity is issued is likely to be uncertain for some time). It also underestimates the complexity of the valuation process for the rights that would have been available to those creditors in an insolvency. We believe that further work is needed to ensure that the valuation details in all respects will be clear, robust and public. It may be that the resolution authority itself should be able to set appropriate guidance including discount rates, valuations principles from derivatives and other assets and liabilities but that guidance should be public and itself should be capable of challenge. Again the importance of efficient processes for the handling of disputes is essential.
Question 2: Should specific types of information be required on deviations from management assumptions, for example on differences in expected cash flows and/or the discount rates?
NAQuestion 3: Would you add, amend, or remove any areas which are likely to be subject to significant valuation uncertainty?
NAQuestion 4: Should the buffer instead always be greater than zero? If yes, how should the buffer be determined?
NAQuestion 5: Do you agree that a valuation of post-conversion equity is necessary to inform decision on the terms of write-down or conversion?
NAQuestion 6: Do you agree with the definition of equity value for this purpose in Article 2 (i)? If not, what changes should be made to the definition? Should the definition be more closely linked to the net asset value determined on the basis of the remainder of valuation 2 adjusted for goodwill/’badwill’, and if so how should that adjustment be estimated?
NAQuestion 7: As an alternative, should the use of information that becomes available after the resolution date be more restricted, and in particular permitted only if it refers to facts and circumstances existing at the resolution date which could reasonably have been known at that date?
Questions 7 and 8 – While the terms of the draft Delegated Regulation grapple with a difficult question in relation to claims that are not easy to value, we consider it important, in order to adhere to the principles of the BRRD that later information must be taken into account in relation to the definitive valuation. This should be clarified in the text and we consider that any extension of the restrictions on the use of information available after the resolution date (as postulated in these questions) should be rejected. Otherwise, there seems to be the potential that the legislation would create significant injustice, deviating from normal expectations with regard to the treatment of property rights, particularly as regards any rights which are contingent, in dispute or depend on other information (eg an expert assessment or report or ascertainment of information held on public or private registers). This would also not reflect the approach taken to the valuation of such claims in an insolvency, which would be at odds with the intentions of the BRRD. The outcome, in so far as it affects creditors whose rights are the subject of a relevant valuation, could result in the effective appropriation of property rights relating to claims which are less easily valued, resulting in a disparity of treatment of creditors ranking equally according to the ease of valuation., so that they would be left without compensation on the same basis as is afforded to holders of rights which are more easily valued.General There are 3 questions on which the consultation and draft Delegated Regulation are silent, which are of considerable legal and practical importance:
1) It is not clear what happens if the ex post valuation shows that the resolution was either not well founded because it transpires the resolution threshold were not in fact satisfied or on terms which were inappropriate because they were more extensive than required? Is there any remedy available and if so what is it?
2) It is unclear what happens if because of poor record keeping, processing error or misunderstanding by the valuer, any particular liability or asset (or class of liability or assets) is omitted from the valuation process altogether, is wholly or partially omitted in the assignment of equity to a creditor, or class of creditor, or is under or overvalued. This sort of error could significantly affect the amount of equity issued to a creditor or class of creditor, so treating them unfairly in relation to other creditors whose rights have been correctly valued. This is not a process in which NCWO will assist in giving a correct result (e.g. because it may have been determined that the creditor would have received nothing or less in an insolvency than the value of the equity that was actually issued to him, although this is less than the equity that should have been issued to him if his claim had been correctly assessed and valued for the bail-in conversion process). It seems to us that there needs to be a process to enable affected bailed-in creditors to make good their entitlement to a higher amount of the new equity (and for over-entitlements to be clawed back). At present there is no such process and one needs to be provided to prevent the legislation failing to meet basic standards in the protection of property rights. It may be that arbitration processes would be cheaper and speedier for resolving such disputes than leaving all issues to be determined by the courts and we consider that thought could usefully be given to setting up such a process.
3) NCWO applies without a de minimis and it will often be the case that ordinary creditors would always have received something on an insolvency. Therefore in any case where the new equity proves to be of little or no value, there could be a very large number of claims if ordinary creditors have been bailed-in (in addition to those holding bailable instruments). The methodologies in the draft Delegated Regulation for determining the NCWO claims are much to brief to give any degree of predictability to the determination. It seems to us that the draft Delegated Regulation underestimates the difficulty of valuing the new equity (which is unlikely immediately to be quoted, as all the previous equity will have been written off and the financial outlook for the continuing or bridge bank/parent company in which the equity is issued is likely to be uncertain for some time). It also underestimates the complexity of the valuation process for the rights that would have been available to those creditors in an insolvency. We believe that further work is needed to ensure that the valuation details in all respects will be clear, robust and public. It may be that the resolution authority itself should be able to set appropriate guidance including discount rates, valuations principles from derivatives and other assets and liabilities but that guidance should be public and itself should be capable of challenge. Again the importance of efficient processes for the handling of disputes is essential.
Question 8: Should the use of information available after the resolution date be further limited, for example by requiring that such information is only used if it results in a significant change in the values of the entity’s assets or liabilities?
See Answer to Question 7Question 9: Should these technical standards provide further detail on the characteristics of appropriate discount rates?
NAQuestion 10: Are there any changes you would suggest to the methodology for determining actual treatment of shareholders and creditors in resolution? In particular, should the methodology for valuing equity be further specified and, if so, what should be included in that specification (whether additional detail on the current approach, or a different approach, linked for example to net asset values adjusted for goodwill/badwill)?
NAQuestion 11: Should the valuer be required to accompany the comparison envisaged in Article 7 of this Regulation with additional relevant disclosures? If yes, what should those be (for example, documentation of any differences between the valuation of actual treatment and the market price that would be observed for those same claims were they traded in an active market)?
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