Wind-Down Planning and Risk Management Under Scrutiny for Payments and E-Money Firms

Not a single firm met expectations in the FCA’s multi-firm review of risk and wind-down planning. From liquidity blind spots to underdeveloped WDPs, Thistle Initiatives' Alejandro Bondjale Hinestrosa says the findings present a clear call to action for the sector.

The Financial Conduct Authority (FCA) has published a comprehensive multi-firm review highlighting critical gaps in risk management and wind-down planning (WDP) among e-money and payment services firms. This review comes at a pivotal moment, highlighting the urgent need for improvements across a sector experiencing rapid growth and innovation.

The FCA emphasises that effective enterprise-wide risk management is not merely a regulatory tick-box exercise, but a key element for the sustainable growth and integrity of a firm. The observations indicate that many firms fall short of expectations, particularly concerning the maturity of their liquidity risk management and the thorough consideration of group risk.

Key Shortcomings Identified by the FCA

The FCA’s review highlighted several recurring issues within the sector:

Enterprise-wide Risk Management

• Many firms maintain risk management frameworks that fail to reflect their current operational complexity, relying excessively on qualitative judgement rather than robust quantitative methods.
• Firms frequently set risk appetites at regulatory minimums without adequately considering actual risk profiles, hindering informed decision-making.
• Stress testing remains underused, leaving firms unable to properly quantify financial resources needed to withstand adverse scenarios.

Liquidity Risk Management

• Significant immaturity exists in identifying and mitigating liquidity risks. Firms often depend on existing cash reserves without properly stress-testing these resources under crisis conditions.
• Inadequate attention is given to liquidity implications of customer credit facilities and margin calls, resulting in underestimated liquidity needs.
• Firms frequently overlook risks related to safeguarded funds, including potential shortfalls and market liquidity disruptions.

Group Risk Considerations

• There is a widespread tendency to rely on group-wide risk management policies without verifying their suitability for individual firm-level risks.
• Firms often neglect to assess operational and financial dependencies within broader group structures, complicating crisis decision-making and response.

Enhancing Wind-Down Planning (WDPs)

Beyond risk management, the review also provided a keen focus on wind-down planning. The FCA's findings indicate that while firms are attempting to structure their WDPs in line with guidance, the content remains significantly underdeveloped:

• Plans often lack operational detail, realistic timelines, and practical execution strategies, rendering them largely theoretical and impractical.
• Financial modelling within WDPs is typically superficial, failing to adequately consider the financial implications of wind-down scenarios, especially liquidity constraints.
• Critical triggers related to safeguarding asset shortages or lapsing safeguarding insurance remain inadequately integrated into firms' WDPs, despite clear FCA guidance.
• Testing and validation exercises, essential for ensuring WDP effectiveness, remain sporadic and incomplete.

Good Practices Recommended by the FCA

Firms demonstrating best practices were found to:

• Integrate comprehensive stress-testing into their enterprise-wide risk frameworks, clearly quantifying resource requirements.
• Establish explicit liquidity risk frameworks with scenario-based stress testing and clearly defined contingency funding plans.
• Align detailed and actionable wind-down triggers with firm-specific risk profiles, regularly validating these through robust scenario-testing exercises.
• Explicitly account for safeguarding arrangements and the liquidity impact of safeguarded assets within risk assessments.

Safeguarding – A Growing Priority

Safeguarding remains a critical area requiring enhanced focus. Recent turbulence in foreign exchange markets, which has impacted liquidity resources, reiterates the necessity for robust safeguarding arrangements integrated seamlessly into broader risk management and wind-down frameworks. Firms should actively review FCA proposals in CP24/20 and ensure their safeguarding procedures adequately account for market volatility and potential shortfalls.

Meeting FCA Expectations: A Call to Action?

None of the 14 firms reviewed by the FCA fully met regulatory expectations, particularly in aligning their practices with FG20/1 guidance. This significant gap highlights a clear industry-wide imperative: firms must urgently revisit their risk management and wind-down planning arrangements.

How Thistle Initiatives Can Help

At Thistle Initiatives, we specialise in guiding e-money and payments firms to enhance their risk management frameworks and wind-down planning. Through our tailored Risk Management as a Service offering, we deliver robust and compliant solutions that protect your firm’s growth trajectory and operational resilience.

To understand how our experts can assist your firm, read more here. 

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