Firms fall short on wind-down planning in FCA review

The regulator’s latest thematic review of wind-down planning across the industry, found that most firms do not meet its expectations. Critically, it also found many firms’ wind-down plans were non-existent. Where firms did have a plan, many of them consisted of a brief analysis which lacked the level of detail required.  

The review involved a series of bilateral discussions with various firms and document reviews, particularly focusing on liquidity needs during wind-down, intra-group dependencies, and wind-down triggers. The regulator then published its key observations on what was good practice, and what was lacking.

The pandemic highlighted the significant risk of harm arising from economic volatility and a shortage of adequate liquid resources, so inadequate wind-down processes are a cause for concern for the FCA.

Wind-down planning – the FCA’s expectations

The FCA’s most basic expectation is that all regulated firms have an adequate wind-down plan in place. This means that they need to be able to show their plan is credible and operable, especially regarding liquidity and cashflow modelling, intra-group dependency and understanding their wind-down triggers. The review found many firms used Fixed Overhead Requirements as a proxy, which is insufficient in the eyes of the regulator.

The FCA’s review has a number of specific points that it would like to see firms pick up on. First, plans need to be “credible and operable”. They recommend firms test their plans so they can demonstrate this to the firm’s board and regulators (although for many firms this may not be realistic). Firms need to be able to demonstrate to the FCA they understand their cash flows during the wind-down period. Firms can experience large cash outflows early on in the wind down process and these temporary cash mismatches need to be managed.

In addition, when assessing their wind-down plans, firms must do so from a stressed cash position as their starting point. A plan can only be considered credible if it stands up when the company has gone through a stress: that is when they are considering winding-down. Firms are also expected to think about how to embed their wind-down planning into their risk management framework, recognising that a disorderly process is a potential cause of harm.

For many firms within Groups, the FCA found inadequate consideration of the impact of
Group membership on the firm’s ability to wind-down, particularly firms within overseas Groups. The regulated firm may rely on other firms in the group for its funding or providing essential services. This can create additional complexity in wind down. Examples of good practice observed by the regulator included mapping out the list of existing interconnectivities and adequately skilled governance of the UK entities.

Finally, the FCA noted that wind-down triggers are an essential part of wind-down planning. They should be designed such that the firm enters wind-down at a point where it will have sufficient financial and operational resources to complete the process in an orderly manner. There should also be a senior manager with a clear line of responsibility for this area.

Next steps

Firms need to be aware of the FCA’s expectations on wind down and how best to meet them. Given the focus on liquidity firms should review this aspect of their wind-down plans to make sure cash flow modelling has been carried out in sufficient detail. Testing the outcomes of wind-down planning is the best way of showing the firm’s Board or governing body, as well as the FCA that the plan and process is credible and operable.

Although these are for now only observations on wind-down planning from the FCA, firms will be expected to take note and develop their own wind down plans accordingly. This will be getting particularly urgent for firms who are drafting their ICARA as they will need the wind down plan to assess their financial resources requirements.