Navigating FCA Wind-down plans

Wind-down plans mitigate the potential adverse impacts felt by consumer and on the wider market as a whole and occur when a firm decides to cease its regulated operations. The Financial Conduct Authority (FCA) requires all solo-regulated firms to maintain a wind-down plan. A wind-down plan should address both voluntary solvent exits and emergency situations leading to an unplanned shutdown or insolvency. The FCA has prepared a guidance page to ensure that firms are able to execute wind-down plans effectively.

Objectivus has advised firms on the development and resilience of multiple firm’s wind-down plans ensuring that firms take thoughtful precautions when deciding on likely events and stresses which have the potential to trigger wind-down plan actions. We will happily provide your firm with a review should you require it. We will conduct a robust review of your plan in order to minimise harm and prevent a lack of oversight.

Wind-down planning has become an area of significant focus for the FCA as a result of the supervisory work. This was highlighted within the FCA IFPR implementation observations, which categorised wind-down panning assessments as weak both in term of scope and quantification.

Areas of focus include:

• Scenarios leading a firm to wind-down its business operations.
• Potential impact on consumers and financial markets.
• Operational tasks required and time necessary to execute each task.
• Capital to absorb winding-down costs and additional losses.
• Liquid resources necessary to support cash outflows.
• Wind-down triggers should be appropriately considered and measured by the firm’s risk management framework.
• Routine testing to demonstrate operability in the form of a “fire drill’.

The FCA has identified that firms have struggled with wind-down plans in the past especially with respect to being using realistic timescales and when considering how both financial and non-financial resources need to be maintained during the process of exiting the market. Wind-down planning aims at reducing the impact of a firm’s closure, which stems from the potential harm created from the inability to pay redress, return or transfer clients assets and money or the interruption of the continuity of service.

To prepare a wind-down plan effectively, firms need to consider and incorporate several critical elements based on the guidance from the Financial Conduct Authority (FCA) in the prepared within the FG20-1 document.

Key components for the preparation of wind-down plans include:

Operational and Financial Assessments

• Scenarios: Identify scenarios that could lead to the firm needing to wind down its operations. These scenarios help in understanding potential triggers and preparing for them.
• Impact Analysis: Evaluate the potential impact of winding down on consumers and financial markets. This includes assessing how service discontinuation could affect stakeholders.
• Operational Tasks and Timing: Detail the operational tasks required for winding down and the time necessary to execute each task. This should include identifying key staff, essential systems, and any dependencies on third parties.
• Communication Plan: Develop a plan for communicating with clients, including how and when they will be informed about the wind-down process.

Resource Assessment

• Capital Requirements: Assess the capital needed to absorb the costs of winding down, including any additional losses that might occur during the process.
• Liquid Resources: Determine the liquid resources necessary to support cash outflows during the wind-down period. This involves understanding the nature, amount, and timing of necessary outflows and the availability of liquid assets.
• Estimated Wind-Down Period: From experience, a wind-down period of at least 9 months is considered more realistic than shorter durations. This period is influenced by the firm’s activities, size, and substitutability.

Costs and Liabilities

• Winding-Down Costs: Produce an accurate estimate of the costs associated with winding down, including:
  • Closure costs such as termination penalties, redundancy costs, legal and administrative expenses.
  • Potential redress and litigation costs, considering “what if” scenarios for past misdeeds.
• Resources Availability: Assess the level of both capital and liquid resources available and required, acknowledging that resources might be depleted prior to the decision to wind down.

Further considerations

• Client Assets: Consider the provisions in the client assets resolution pack to facilitate the return of client money and assets.
• Realisable Value of Assets: Evaluate the realisable value of assets, which might be considerably lower than book values, especially for shorter wind-down periods.
• Revenue and Costs: Acknowledge that revenue streams may significantly decrease or cease, and plan for the financial implications of reduced income and residual revenue during the wind-down phase.