Don’t have a Wind Down Plan? Maybe You Should 16/12

9th June 2016


In May, the FCA published a draft approach document for firms seeking to put in place a ‘wind-down’ plan. In wind-down planning, a firm considers how it may cease its regulated activities with minimal adverse impact on its clients, counterparties, or the wider market.

In the past, the FCA has discussed wind-down planning with individual firms on a case by case basis, and many authorized persons and professional advisors have requested clarification on what wind-down planning should cover. When finalized, the approach document will become general guidance in the FCA handbook.

The proposed guidance is aimed at solo-regulated firms, especially those which currently perform related analyses, e.g. estimating wind-down costs for capital planning as part of an ICAAP (Individual Capital Adequacy Assessment Process).

The approach document does not amount to a prescribed approach – no two firms are identical, and the actual wind-down planning process depends on a firm’s specific business and operating model. Instead, the regulator has suggested a logical approach for any firm that has decided to engage in such planning. As such, firms can depart from it as they choose, or use completely different approaches.

To clarify, it is not a strict requirement for firms to have a written wind-down plan in place – unlike, say, the requirement for IFPRU investment firms to have a Remuneration policy. The FCA has drawn on several of its own objectives and the Principles for Business in compiling this guidance, but a firm’s lack of a wind-down plan will not constitute a prima facie breach of the rules.

Despite this, many of CPA Audit’s clients have been asked about wind-down arrangements during FCA visits, and it seems clear to us that a robust wind-down plan will be valuable evidence when it comes to demonstrating an “over and above” approach to compliance.

The following is a brief reference guide to the FCA’s recommended approach to wind-down planning. The full document can be found here

The FCA’s guidance

What is wind-down planning?

Wind-down planning is a process by which the governing body of a firm…

  • Identifies the steps and resources needed to wind down its business
  • Evaluates the potential risks and impact of a wind-down and considers how to mitigate them

An effective wind-down plan may include the following …

  • Wind-Down Scenarios – What scenarios could to lead to a firm no longer being viable?
  • Risk Management Framework -What early warning indicators are there, and what are the possible recover options?
  • Impact Assessment – Who will be affected by the wind-down if it happens?
  • Operational Analysis – What steps would need to be taken during the wind-down process?
  • Time and Cost Estimations – How long will the wind-down process take, and what costs will it incur?
  • Resource Assessment – What resources would be needed to complete the steps identified in the operational analysis?
  • Communications Plan – Which stakeholders need identifying during the wind-down, and what are the best methods for communicating with them?

The end result of this process should be a documented wind-down plan that is approved by the firm’s governing body. The document should be reviewed and refreshed periodically, and after any material change in the firm’s business/operating model. The FCA recommends appointing a member of the firm to oversee all renewals of the document and ensure its continued relevance.

Wind-Down Scenarios

Though there are many reasons why a firm may wind down its activities, a wind-down scenario is generally considered one in which the firm becomes no longer viable (when it lacks sufficient resources to carry on its regulated activities) – as opposed to one where the firm ceases operating whilst remaining viable (through a strategic exit, for example).

When creating a wind-down plan, firms should consider possible events which might make it no longer viable. These might include; a severe economic down turn leading to significant financial losses, a loss of key clients, a loss of critical infrastructure, and so on. When formulating scenarios, firms should consider the following factors.

  • What are the firm’s critical revenue drivers and business lines?
  • Which business areas are subject to the greatest risks?
  • What infrastructure, resources, or third parties does the firm heavily depend?
  • What are the agreed risk appetite and risk thresholds of the firm?
  • What are the state of the firm’s internal audit reports
  • What are the firm’s compliance monitoring processes and reporting?

By identifying such fault lines, firms can then decide which plausible scenarios might lead to its business becoming non-viable.

Risk Management Framework

A wind-down plan will be most effective if supported by a risk management framework – this will help firm’s identify any early warning indicators and possible recovery options.

A risk management framework will require:

  • A clear risk appetite, validated by the governing body – to identify any risk metrics that need to be monitored, and to set appropriate thresholds
  • Well structured management information – to help identify emerging risks that could lead to a wind-down
  • Good reporting processes – to help assess emerging situations as soon as they arise and intervene appropriately
  • Thresholds for relevant management information (profitability, capital adequacy, liquidity) – to help identify any breaches of values, and prompt thinking on next steps

Once a risk-management framework is in place, firms may wish to plan potential options for recovery in the event of problems arising. This is called recovery planning. However, since there is no guarantee that recovery options will save the business, a wind-down plan is still recommended.

Impact Assessment

Through the wind-down planning process, firms should seek to identify and mitigate any negative impact on consumers, counterparties and the wider market that could arise as the result of a wind-down – failure to do so risks violating the FCA’s consumer protection and market integrity objectives. A thorough analysis of all stakeholders will help identify those affected and give an understanding of how difficult a wind-down will be.

When making an impact assessment, firms may consider the following factors.

  • How customers will be affected by the wind-down – e.g. how many existing customers will need dealing with; how the firm will close transactions with these customers; and whether they will be diligent in responding to notices and closing the business relationship
  • How third parties will be effected by the wind-down – employees, suppliers, and counterparties
  • Whether risk-reducing trades will need to be executed, and whether the firm will have access to the right market counter-parties to do so
  • Whether the firm has an effective system for maintaining client and transaction records
  • Any potential tax implications of winding down

Firms may support their impact assessment by making a risk assessment of each stakeholder group and compiling a list of appropriate actions for minimizing the effects of winding down.

Operational Analysis

An operational analysis details the steps that must be taken during the wind-down process. The wind-down period starts when the decision to wind-down is made, and ends with the cancellation of regulatory permission. All the actions that need to be taken between these points should populate the timeline in sequence.

When performing an operational analysis, firms may consider the following factors.

  • How the firm will announce the decision and manage the communications policy
  • Who will need to be available to assist with the wind-down
  • What systems need to be available to assist with the wind-down (e.g. IT systems)
  • How redundancies will be dealt with
  • How the firm will reconcile client’s business records to ensure their interests are not affected
  • Whether professional advisors will be needed
  • Whether there are implications for overseas offices and branches

The end result should be a step-by-step outline of how the wind-down will be conducted. From this, a firm can calculate the estimated length of time it will take, and what resources are needed to complete it.

Time and Costs Estimates

When performing an estimate of the times and costs involved in winding down, firms should consider:

  • The time necessary to complete the wind-down, up to the point that the FCA removes the firms permission
  • The costs that will be incurred by winding down, e.g. redundancy payments, retainer premiums for essential employees, legal and professional fees, and cancellation penalties with third party providers.
  • Any revenue streams that may continue through the wind-down period up to the cancellation, e.g. income streams from contracts with existing clients

The FCA recommends setting out a month-by-month schedule of revenue and costs covering the entire wind-down period.

Resource Assessment

Firms need to have adequate financial and non-financial resources to achieve an effective wind-down. A resource assessment identifies what resources will be available and estimates what will be required to wind-down successfully.

When assessing the financial resources required to wind-down, firms may consider:

  • What inflows can be expected during the wind-down period, and how these will be affected by the triggering event and the decision to wind-down (e.g. predicted revenue)
  • What ordinary outflows can be expected during the wind-down period (e.g. cost of premises, systems maintenance costs)
  • What extra-ordinary outflows can be expected as a result of winding-down (e.g. extra closure costs, legal fees, redundancy payments, retention payments, pension fund deficits, termination penalties and the cost of breaking contracts)

When assessing the non-financial resources required to wind-down, firms may consider:

  • What non-financial resourcesare needed to carry out a wind-down (e.g. key employees, premises, I.T. systems, external advisors, etc)
  • Whether any outsourced services that the firm relies on will be available during the wind-down
  • If the firm is part of a group dependent on group resources, whether the firm would have adequate resources if the group failed.

Communications Plan

In the event of a wind-down, there will be a wide-range of different stakeholders who will need notifying – any relevant regulators (the listing authority, stock exchange, the FCA/PRA, overseas regulators) employees, customers, service providers, shareholders, bondholders, and media. An effective wind-down plan should include a predetermined plan for communicating with each stakeholder group, including draft contents and timings.

When crafting a communications plan, firms should:

  • Identify which stakeholders need engaging
  • Decide the internal process for drafting and approving any communication to the stakeholders
  • Establish guidance and procedures for a communications strategy
  • Prepare holding scripts in advance (since some detailed messaging may only be possible reactively)
  • Decide whether engagement with legal advisors and comms experts will be needed (i.e. media training).

Next Steps

In order to complete a wind-down, the firm must have its Part 4A permission cancelled by the FCA. Before doing so, the FCA will consider:

  • Whether the cancellation will be detrimental to customers or cause significant market disruptions
  • Whether there are any unresolved customer complaints
  • Whether all client monies and assets have been returned in accordance to CASS rules
  • Whether there are any outstanding fees owed to the FCA

The existence of an effective wind-down plan will greatly increase the chances of and speed with which a cancellation is granted.

CPA is able to assist in a wind-variety of ways in relation to wind-down planning:

  • Scoping exercises to determine the nature and extent of the wind down planning your firm is required to have;
  • Working with firms to prepare robust, FCA-compliant wind down plans for Board approval;
  • Assistance with Cancellation applications to the FCA.

We would be able to complete all of the above as part of our Compliance Watch! service, which represents a substantial discount on our normal hourly rates.

As always, please contact a member of the CPA Compliance team if you require any more information.

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