Savvy planning tips for financial services firms.

The Financial Conduct Authority (FCA) is turning up the spotlight on what it sees as “widespread weakness in wind-down planning”. If your wind down planning (WDP) fails to meet the FCA’s expectations, your firm could face an increase in regulatory scrutiny on capital and operational controls. But as Dina Devalia explains, effective wind-down planning isn’t just a compliance exercise. It’s also a good way to test the viability of your operations. So how can you get your wind-down planning up to the mark?

If recent years have taught us anything, it’s that no financial services (FS) organisation, however strong it might seem, is unsinkable. 

Wind-down planning is designed to ensure that regulated FS firms understand the triggers (both external and internal) that could lead to failure and can ensure an orderly regulatory exit of a firm’s business that meets its liabilities and limits any potential harm to consumers.

Activation triggers

The activation triggers for wind-down might be financial, such as a squeeze on liquidity or failure to meet regulatory capital requirements. They might also be non-financial, in areas such as the loss of key clients or personnel. 

Rather than planning for each trigger in isolation, it’s important to think about how they might feed off each other. Examples of this ‘domino effect’ could include a balance sheet deterioration, leading to credit downgrading, customer withdrawals and exit of key staff. 

Roadmap for exit

Once the governing board has made the decision to wind-down, the plan should set out how your firm would go through the various steps towards achieving an orderly exit such as settlement with creditors, unwinding of regulatory transactions, sale of assets and transfer of customer contracts. 

Your plan should also earmark resources (both financial and non-financial) to deliver the wind-down such as accessible cash reserves and retention of the necessary personnel. A key part of this is judging how your cash position and ability to keep staff onboard might change during the wind-down period, and plan accordingly.

Deficiencies identified by the FCA

Having raised initial concerns in the wake of the COVID-19 lockdowns, the FCA carried out a thematic review of wind-down planning in 2022. What comes through strongly is the need for significant improvement to ensure that plans are credible, operable and properly governed. 

The main deficiencies identified by the FCA centred on five areas:

Failure to identify and adequately evaluate the direct and knock-on impacts of the triggers that could precipitate a crisis and cause the board to invoke the wind-down plan. In my experience as both a former regulator and now an adviser to FS firms, the underlying weakness with many wind-down plans stems from insufficient buy-in and active direction from the board. In some cases, boards need to fully understand the operations to be in a position to know when the decision is required to be made. 

Lack of clarity on how the regulatory capital position might deteriorate in a crisis. In my experience, the underlying issues include failure to regularly update the capital analysis and assess the full impact of the domino effect. A fully stress tested cash flow analysis is key to any wind-down plan.

Failure to gauge how much funding would be needed and how accessible it would be once the wind-down plan is activated. Underlying issues include lack of appropriate cash-flow modelling. This includes the location of funds and how easily they could be released if they are tied-up in separate entities. Many plans also lack provision for what may need to be sizable financial incentives to encourage key personnel to stay to project manage and oversee the wind-down. 

A part of the review looked at operational interdependencies in areas such as the provision of IT and other services. This gets more complicated if the business decides to wind-down as a group. While permitting this, the FCA insists on plans for individual entities.

Lack of documentation was a common feature across many FCA reviews, and it is one of the first areas the FCA will assess as it looks for weaknesses. The gaps identified don’t just centre on the analysis carried out to prepare the plans. There was also a lack of evidence that boards were discussing, directing and regularly updating the planning.

Damaging sanctions 

As the FCA steps up scrutiny of wind-down planning, the risk of regulatory intervention is becoming ever more pressing. Some of the tools available to the FCA include the imposition of  an increase in capital demands and the imposition of a skilled persons report. The FCA could also place limits on a firm’s permissions by way of a variation, especially if it believes that deficiencies in wind-down planning might impinge on other regulatory obligations in areas such as consumer protection and anti-money laundering (AML) requirements.

In addition to its regulatory powers there is the inherent risk that the FCA could impose individual sanctions under the senior manager’s regime. But in many ways, the key risk is remediation. If the FCA says that you need to redraft your plans from scratch, this will take up a lot of time and resources, and certainly more than would be required to get it right the first time around. 

Valuable health check

Importantly, the benefits of improved wind-down planning go beyond satisfying the FCA. In my experience, a thorough assessment and wind-down planning process can reveal weaknesses or areas for improvement that might not be obvious otherwise. For example, a firm I worked with discovered that one of its operations was actually running at a loss and was therefore in need of rationalisation. This insight proved valuable for the firm going forwards.

Setting firm foundations 

There is no prescriptive check list for wind-down planning or how it should be structured. But there are firm foundations that you can put in place and build up from to deliver the regulatory assurance and business benefits. In my experience, three priorities stand out:

1/ Lead from the top
Your board should actively lead the wind-down planning and regularly review and update it as part of its governance structure. 

Only your firm’s board can have a real sense of the vulnerabilities, how they might combine when your firm comes under threat and under what circumstances they would need to press the wind-down button. Only your board can assess that it has the requisite resources to achieve a wind-down.

2/ See the big picture
Rather than looking at wind-down planning in isolation, it’s important to think about how it feeds into and feeds off multiple regulatory obligations in areas ranging from capital and liquidity requirements to Consumer Duty, AML and senior manager certification. 

3/ Prove it
The cornerstone for effective planning and governance is  to check that its detailed cash flow modelling supports the plan and that it is rigorously stress tested. The scenarios include a worst-case liquidity position at the lowest point in the cycle or when the firm comes under threat. 

The results from your analysis, assumptions that underpin it and management actions you would take in response would then need to be clearly documented. 

Planning to succeed

Wind-down planning involves a lot more than many FS organisations assume. Failure to plan effectively is planning to fail, with regulatory sanctions compounded by business upheaval. On the flipside, the time and care you put into wind-down planning will pay off. 

Here to help

If your firm has prepared a wind-down plan, we can carry out a targeted assessment. This includes checking existing documentation against the FCA’s expectations. We can also carry out a broader examination of the robustness of the wind-down planning process or assist you in delivering required enhancements.

If your firm is required to prepare a wind-down plan for the first time, we can advise on regulatory requirements and help you draw up the triggers, steps to take and underlying documentation. We can either coordinate the end-to-end process or support specific elements such as facilitating workshops or advising on specific steps.

If you would like to know more about wind-down planning or how we can help, please get in touch.

Dina Devalia

Dina Devalia
Managing Director