Navigating the wind-down planning process
With the rise in what Financial Conduct Authority CEO Nikhil Rathi calls ‘predictable volatility’, there has been growing regulatory scrutiny around firms’ financial resilience and whether their wind-down planning is effective. The FCA understands that firms may fail, and minimising the impact and customer harm from a regulated firm failure is one of the key FCA priorities. At the point of a firm's failure there is limited time available for the regulator to take steps to mitigate the harms from failure. This explains the regulator’s focus on firms having a robust and up to date wind-down plan - it is essential for a firm to wind down its regulated activities in a controlled manner that minimises the adverse impacts to its customers and the broader market.
In a recent Thistle Initiatives webinar, Credit and Insurance Partner, Matthew Williamson and Senior Manager, Anthony Corner were joined by insolvency practitioner Alex Watkins, Director at Interpath, to discuss how firms should approach the wind-down planning process.
Here are the key takeaways from the webinar:
Understand your wind-down triggers
Firms need to ensure they have a robust wind-down plan in place and that they understand the triggers that might lead to a plan being implemented, says Alex. While a common trigger is a loss of customers that impacts revenue, other triggers that firms often don’t tend to recognise include incidents such as a major hack or data breach, or APP fraud. “Firms also need to consider whether they have the resources to wind-down solvently and to identify the trigger for turning a solvent wind-down into an insolvent wind-down,” says Alex. To that end, board directors need to consider whether the firm has ‘reasonable prospects’ of avoiding a terminal insolvency. If the firm loses reasonable prospects, the board should then appoint an insolvency practitioner to complete the wind-down. Firms should keep their wind-down plan up to date and reviewed annually, however if it is in the process of a solvent wind-down, it should review those prospects more regularly, for example monthly. In a stressed scenario, it could be weekly or even daily.
Managing wind-down governance
Wind-down governance is a two-fold process: planning the wind-down, and the actions associated with a wind-down event. This starts with understanding who is responsible for what and when. Planning should be a continuous discussion item at board meetings among those who are responsible for it, including monitoring the triggers for a wind-down and ensuring they remain appropriate, says Anthony. Firms also need to ensure there is an easy way to raise concerns quickly and effectively if a change in direction is needed, Anthony says. “We always recommend wind-down committees are established early within a business’s development and they’re empowered to make requests when needed,” he adds. If the planning has been completed correctly, then the responsibilities, actions and timelines should be clear to all involved when a wind-down is in progress, and clear to the regulator should they ask to view such plans. There also needs to be contingencies in place if key individuals depart during the wind-down, often overlooked, as well as clear avenues to raise concerns if certain activities are taking longer than expected so they can be rectified quickly without impacting the overall timeline.
Keeping the lights on during a wind-down
In addition to wind-down planning and governance, firms must also establish what a wind-down means for them operationally. This involves identifying who are the key personnel that will be needed for an effective wind-down, including the governing body, senior management team and frontline staff, as well as all support lines (given that regulatory obligations still apply during the wind-down process), says Matthew. Some firms may also appoint third-party consultants to execute the wind-down process. “This does carve the risk around managing staff retention, but equally you need to make sure you’ve done your due diligence on those third parties,” says Matthew. Firms must also consider contractual commitments and potential restrictions or penalties for breaking those contracts early. As part of this process, firms should also consider strategy, for example identifying key milestones and whether they are realistic, says Alex. Ensuring there is adequate liquidity and financial resources to manage the wind-down is also critical, adds Alex.
Identify and mitigate against associated wind-down risks
Maintaining an appropriate risk management framework is also an essential part of meeting the FCA’s wind-down expectations. “The key risk from the FCA’s perspective in wind-down scenarios is the disruption of services to customers, leading to a potential loss of funds” says Anthony. Effective risk management therefore means ensuring that anything that is key to a firm’s operations remains functional at all times during the wind-down, particularly systems that customers use, as well as processes such as safeguarding customer funds and regulatory reporting. “The FCA obviously prioritises customer protection during the firm’s wind-down, so risk management helps firms anticipate and mitigate the risks of customer harm, such as delays, access to funds, poor communication and other complaints” says Anthony. A sound risk management framework also ensures firms can identify and monitor financial risks to avoid liquidity shortfalls or unexpected liabilities such as fines, he adds.
To find out how Thistle Initiatives and Alex Watkins can help you develop an effective wind-down strategy, get in touch today. To learn more about the wind-down process and the FCA’s expectations, watch the full webinar here.