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Wind down planning: the FCA’s latest paper reviewed

14 June 2022
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The FCA recently released a thematic review report containing their key observations on firms’ wind-down planning procedures for wind down planning which, in part, incorporates learnings in the wake of the covid-19 pandemic. The document seeks to rectify common misconceptions from the approaches taken by some firms and seeks to firmly set the expectation in those areas.

The report will be of particular interest to investment firms which are required to undertake and document their new Internal Capital Adequacy and Risk Assessment (ICARA) process for the first time this year under the new rules. But other FCA-regulated should take heed too – the FCA’s view is that all firms must hold sufficient financial resources to ensure they can wind down in an orderly manner – as detailed in their 2020 final guidance paper – in order to remain compliant with the all-important threshold conditions.

The aim of a wind-down plan is to ensure that firms have sufficient financial and non-financial resources to ensure an orderly wind-down of business operations. The paper pinpoints the importance of liquidity at a firm level, given that the FCA observed the potential lack of liquidity in a wind-down situation to be ‘a significant driver of harm’, citing recent high-profile examples where liquidity timing mismatches were a key proponent of failure. However, the FCA also states that firms have shown ‘widespread’ shortcomings in planning, processes and documentation, which is a concern given the FCA cannot closely supervise all firms on a relationship basis, meaning as a minimum firms but be able to fail without risk of harms to their customers and the markets.

Specifically, many firms’ risk management framework does not meet FCA expectations for identifying potential drivers or triggers for wind-down scenarios. The FCA report reinforces that an important part of wind down planning is implementing wind down triggers, so that firms have a clear understanding of the specified points at which to act and consider whether to begin a wind-down. This is important because without wind down triggers there is a risk that a wind down will begin too late into a period of operational or business stress. This in turn means that when the wind-down is initiated, insufficient financial resources are available leaving fewer options open for the firm.

One key implication of this is that cashflow modelling for a firm’s wind-down plan needs to be ‘credible and operable’. For this, the FCA make clear that a firm needs to know their cash flow position prior to a wind-down and then set out likely inflows and outflows that will occur during a wind-down, using appropriate assumptions. An example of this could be modelling a period of financial difficulty causing erosion of capital and liquidity – the firm would need a clear understanding of the point at which a wind-down must be triggered to ensure it can remain orderly, allowing for the incidental costs and liquidity needs arising as a result of that decision.

The FCA’s report also emphasises that a sufficiently granular time scale should be used, and the total funding impact of the wind down should be calculated so that capital and liquid assets can be set at a prudent level in the case of a wind-down situation.

The FCA further observes that intra-group dependencies between firms, whilst often seen by firms as solely positive, can also present a risk of stress to cash flow, citing the possibility of parental failure as an example. Mapping out the existing interconnectivities within the group, and then interconnectivity during a wind-down is good practice. Furthermore, firms should assess each point of interconnectivity on their ability to wind down – and categorise them by impact. Independent and adequately skilled governance of UK entities is also highlighted, so that firms in the group can plan for changes to the operating model. The FCA says however, that it can be difficult for firms in overseas groups to impact the decision making of other group entities or its parent. It is also pointed out that the plans of many firms to unwind points of interconnectivity during a wind down are not credible, so the credibility of any mitigation measure as well as the time and resources required to implement these changes should be critically assessed. The FCA also points out that a wind down can be completed as a group, but only if it adequately covers every entity within the group, including laying out the roles and responsibilities of the boards and executive committees of each legal entity in the group and an operational plan for how each entity will be wound down.

The report highlights a potential solution to a number of these issues raised, being what the FCA considers good liquidity practice, that to maintain ‘ring-fenced’ liquidity explicitly for a potential wind-down. The amount of liquidity should consider any cashflow timing mismatches, as well as the net cash impact of the wind-down and the risk tolerance of the firm. This liquidity should be held in non-stress environments to ensure that cash is available in the case of a wind down. Additionally, it is good practice for this liquidity to only be useable following board approval  Clearly, this presents the issue, which is a bug bear of many firms, which is the holding of redundant cash on the balance sheet earning little to no return – the good news is that options are available to firms which offers a better return without impacting a firm’s eligible capital resources or liquid assets, so these should be considered carefully and deployed strategically.

The report underlines that it is up to firms to determine how they design their wind down planning documentation, but the word of warning from the FCA is that if they judge from that documentation that financial resources for a wind-down are insufficient or not appropriately justified, the firm will be directed to take specific corrective action.

In addition to the points raised in this thematic review paper, firms can refer to the FCA’s wind-down planning guide for the full picture on how to implement wind-down plans appropriately.

Wheelhouse Advisors’ specialist prudential team collaborates with firms to design and document effective and proportionate wind-down plans as well as other processes which collectively form the ICARA process (including financial forecasting, stress and scenario testing, assessments of material harms, ICARA process documentation). If you would like to discuss how Wheelhouse Advisors may assist your firm in any of these areas, please contact Mike Chambers at