END OF A CHAPTER?
CONSIDERING WIND-DOWN PLANS

GRANT THORNTON

The FCA’s focus on the content and quality of wind-down plans (WDPs) continues, most recently with the regulator creating a new webpage in March 2024 advising firms how to prepare effective WDPs. All firms are expected to have a WDP in place to enable a firm to cease its regulated activities with minimal adverse impact on its customers, counterparties and the wider markets.

The new webpage advises firms on the required components of a WDP. This includes identifying the steps and resources a firm will need to wind-down its business, especially in a situation where resources are limited, and evaluating the risks and impact of a wind-down and considering how to mitigate these risks to continue to achieve an effective wind-down of the entity and its business.

However, the FCA has frequently been vocal when WDPs do not meet their expectations. In November 2023, the FCA published detailed feedback outlining good and poor practices in WDPs as part of their concluding report on Investment Firms Prudential Regime implementation observations. While this feedback was targeted at investment firms, we review and advise on WDPs across all financial services (FS) sub-sectors and these comments from the FCA resonate with what we see in the wider FS market, including consumer credit firms.

GOOD PRACTICES IDENTIFIED INCLUDE:

• WDPs being sufficiently detailed to identify business as usual costs, wind-down driven costs, and cashflow mismatches. This often means a firm being required to prepare a financial model for a wind-down covering off how working capital will be managed at a minimum.
• Testing through simulations or ‘war games’, i.e. detailed scenario considerations of the implementation of any wind-down.
• In addition to formal triggers on capital and liquidity, using non-financial triggers, for instance, on reputational risk or key client concentration.
• Appropriate consideration of group WDPs and any trigger points contained therein, as well as the order with which the affected legal entities would be wound down. This includes highlighting and addressing group interdependencies whether through systems and processes, people or legal contracts, and with group entities providing critical services who are themselves in wind-down.

POOR PRACTICES IDENTIFIED INCLUDE:

• WDPs not being updated for years. We recommend an annual review, or at a point of any material change to the business.
• WDPs and cost assumptions not being aligned. This can be supported through improved financial modelling.
• Using unrealistic assumptions, particularly the activation of the wind-down being assumed to take place under normal, instead of stressed conditions. This means the possibility that liquid assets and own funds have been depleted by a prior restructuring attempt when wind-down commences has not been considered. Often WDPs are prepared with a regulatory mindset and require the economic and commercial overlay driven by theoretical distress.
• Group dependencies not being comprehensively considered and assessed, or the impact of group WDPs on shared systems, costs and resources not considered.

IN CONCLUSION

The overarching objective is for a WDP to reduce any risks of negative impacts on a firm’s customers and market should it need to wind-down its regulated business. A robust and deliverable WDP can also act as a tool to build stakeholder confidence, where a firm can demonstrate risks have been appropriately considered across the business.

In our experience, updating or preparing a WDP is best performed with a collaborative and holistic approach with input from individuals across a firm, as well as professional advisors.