FCA alert: The essential role of a wind-down plan

Although the alert is part of the wider section of the FCA’s website on ‘How to apply for authorisation or registration’, it aims to provide a comprehensive summary on the Wind-Down Planning Guide part of the FCA’s Handbook thus reinforcing their expectation from firms to have a robust and realistic wind down plan in place.

Key factors to consider

The wind-down period ‘starts’ when a firm’s governing body makes the formal decision to lessen its regulated business and notifies the FCA. The period ‘ends’ when the FCA cancels the firm’s authorisation or registration. 

The wind plan is expected to cover the following:

• Scenarios that could lead to a firm no longer being viable,
• the plan to wind-down the business in an orderly manner,
• the assessment of the necessary financial and non-financial resources
• and finally, the processes in place to identify and mitigate any material risks or obstacles to winding down in an orderly manner. 

More recently the FCA reiterated that firms need to consider whether there are interdependencies within the wider firm group. Where a firm is part of a larger group, it needs to consider the implications of the costs, the duration, and the simplicity of the plan, as well as the dependency governance, financing, and operations functions of the group. 

The financial aspect of the wind-down plan is usually neglected by firms as during wind-down periods, firms will likely have non-routine cash inflows and outflows and extraordinary outflows associated with winding down. Firms are expected to consider such costs occurring and assess whether the firm can meet its obligations during the period whilst minimising harm. 

Poor practice 

Below is a reminder of the ‘poor practice’ published by the FCA within their ‘Concluding Report’ on IFPR implementation observations.  

• Wind-down plans had not been updated for years. 
• Wind-down plans and cost assumptions were not aligned.
• Assumptions were unrealistic. In particular, the activation of the wind-down was assumed to take control under normal, instead of stressed conditions. The possibility that liquid assets and own funds have been depleted by prior stress when wind-down commences was not considered.
• The impact on financial resources did not consider stress conditions such as the fire sale of assets, the acceleration of liability payments, or clients transferring businesses away from the firm at a faster rate.
• Group dependencies were not comprehensively considered and assessed.
• The impact of group wind-down plans on shared systems, costs, and resources was not considered. The viability of service companies was not assessed. 
• For firms belonging to a wider group of firms, wind-down plans did not consider the possibility that the wind-down was caused by, or causes, the wind-down of other firms in the group or the entire group. 
• No consideration was made of the involvement that may be required from group governance, nor were any group-wide risk appetite statements considered. 
• Wind-down plans prepared individually by firms that were part of a group of firms had inconsistencies with the wind-down plans of other firms in the wider group. They also did not consider group dependencies. 
• Wind-down plans were not tested.
• Expectations outlined in the FCA wind-down planning guide and Finalised Guidance 20/1 were not met.

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