The FCA has, yesterday, told payment and e-money institutions that they must produce wind-down plans (WDP) as a condition of authorisation. The move is the latest in a chain of measures designed to reinforce the integrity of the UK’s financial system by protecting consumers from undue economic harm in the case of an institution’s collapse.
The impetus for wind-down planning can be traced back to the financial crisis when regulators were left scrambling at very short notice to understand the implications of a firm’s collapse on its clients and the wider market, in order to mitigate the fallout. In response, the Financial Stability Board’s concept of Recovery & Resolution Planning emerged. This “living will” introduced the need to consider in advance those services which firms should prioritise, to protect consumers, in the event of distress. Subsequently, the FCA, in response to requests from firms, issued its Wind-down Planning Guide. This guidance outlines the features of an effective WDP to ensure an orderly wind-down with minimal adverse impact on clients.
Jump to the present, and the FCA published finalised guidance just yesterday, following a short consultation in May on safeguarding and wind-down planning in light of the exceptional circumstances of the coronavirus pandemic, which confirms that the regulator considers WDPs a condition of authorisation; moving WDPs from ‘best practice’ to an obligatory component of an institution’s authorisation.
Focus of the supervisor
This focus on wind-down planning was also seen in the FCA’s Final Guidance 20/1, June 2020 where adequate financial resources is explained not only in relation to the importance of a firm’s ability to remain financially viable, but also in its ability to effect an orderly wind-down without causing undue economic harm to consumers or to the integrity of the UK financial system.
Indeed, the FCA’s feedback regarding firms own assessment of adequate financial resources aims not only to ensure that firms hold adequate resources to reflect the harm they may cause, but also to minimise harm in the event of failure by having firms hold adequate resources and effective wind-down arrangements.
Since wind-down planning aims to reduce the impact of a firm’s closure, it is necessary to identify when the business becomes unsavable and the point before that when it looks like it might be heading that way. We call these trigger thresholds ‘the wind-down threshold’ and ‘the alert threshold’ respectively.
The FCA has specified that firms should consider setting trigger thresholds for relevant management information such as payment volume, profitability, capital and liquidity. Therefore, if the data reveals a breach of those threshold values, senior management will be alerted to take both corrective action, where possible, and the preparatory steps outlined in the plan. Similarly, firms should proactively identify the scenarios which might lead the business to becoming unviable.
In developing the wind-down plan, a firm should consider scenarios under which it may be compelled to wind-down. This reverse stress testing should include a scenario that has a fast and bespoke impact on the business and another that is more gradual and that involves sector-wide influences. Typical scenarios to consider include significant financial, clientele, or infrastructure losses. A firm might also consider its operating model, key revenue drivers and vulnerable areas.
Ideally, a firm will consider multiple scenarios alongside the recovery options which it would employ in response. When the reverse stress-testing indicates that these options are no longer available and the business is no longer viable, then the firm has identified the point at which the wind-down procedure should begin. Unlike other regulators, the FCA hasn’t specifically required that recovery options should be included but it can be helpful to the firm to give thought to those strategies as well.
The plan should detail how the firm will wind-down to have least detriment to its clients and the wider financial system and it should therefore identify those services that will be maintained as it strips itself down to its core operation mode. The plan should detail how the firm will refund clients and complete requested transfers or payments as well as fulfilling any residual obligations and continuing regulatory compliance.
The plan should indicate when the firm intends to apply to cancel its authorisation or registration and how long the wind-down process will take. The FCA has stated that a three-month wind-down period may not be enough and, in most cases, a period of at least nine months is more realistic.
Essential Considerations of the wind-down plan
Funding and triggers
The plan should outline how long the wind-down period will take, how much it will cost and how it will be funded. Setting the trigger for wind-down too high may push a firm into winding-down too soon when the business is still technically viable.
The plan is expected to allow time for clients to move to a different provider. This time should be based upon the number of alternative providers and the time it is expected to take to complete the transfer process. This analysis should be set out in the WDP alongside any actions being taken to make the process easier for counterparties.
Information for the administrator
The WDP should also contain the required information for administrators or liquidators in line with regulatory archiving requirements.
The WDP should also contain an impact assessment, operational analysis, communication plan and resource assessment. These should consider all aspects involved in the wind-down process.
- Take the process seriously in order to prevent re-working.
- Support your wind-down strategy with reference to your specific circumstances.
- Use monthly financial data.
- Involve representatives from across the business.
- Limit the number of indicators and scenarios (too many and it will become unwieldy).Be realistic, not optimistic.
How fscom can help
fscom has partnered with Sia Partners’ subject matter experts who have extensive experience in compiling recovery and exit plans for payment and e-money institutions in the Netherlands. The Dutch regulator, the DNB, has focused significantly on this requirement in recent years and, therefore, Sia Partners are in an excellent position to share their experience and knowledge in devising robust wind-down plans while fscom ensures it is tailored to both the client and to the FCA's expectations.
Using information we gather from you, through a series of meaningful interactions, fscom can apply its understanding of your business model, operations and your current and forecast financial situation to develop a robust and bespoke WDP which is specific to your current situation. fscom also offers assistance in the preparation of a slide pack for presentation of the WDP to your board and support in responding to FCA questions.
If you have any queries on wind-down plans, feel free to get in touch.