The FCA has published a Thematic Review report which provides some observations around the quality of wind-down planning in firms.
The report can be read here. A brief summary of the key observations is noted below.
During wind-down a firm must continue to pay its liabilities as they fall due. Failure to do so could push the firm into a disorderly wind-down or an insolvency process. The FCA reported seeing that firms often consider capital needs in their wind-down plans but do not consider liquidity. A firm should consider how its cash position may change during the wind-down period, and plan accordingly.
Cash flow timing
Firms must have the ability to fund any temporary mismatches which occur during wind-down, some of which can be very significant for certain business models. The FCA observed that, even though a firm may be net cash positive over the entire wind-down period, it can experience significant cash timing mismatches during wind-down, for example due to reduced revenue and increased costs over the wind-down period. Firms should create a comprehensive list of inflows, outflows and possible side effects of wind-down including:
- Clients are likely to be more cautious, eg reducing the level of funds held with the firm.
- Finance providers are likely to withdraw facilities.
- Creditors are likely to become more demanding.
- Debtors may become more reluctant to pay, delaying receipts.
- Staff may leave, creating operational challenges around cashflow management, and the potential need for expensive cover arrangements.
- New revenue is likely to be reduced by wind-down.
- Revenues from residual and historic business may be largely unaffected.
Wind-down triggers are an essential part of wind-down planning. They should be designed such that the firm enters wind-down at a point where it will have sufficient financial and operational resources to complete an orderly wind-down.
Wind-down triggers should be considered as an initiation point for the firm to act and consider whether wind-down is required. The FCA observed that many firms failed to consider an appropriate range of wind-down trigger metrics (eg capital resources) and the calibration of the wind-down triggers was not justified.
Failure to create adequate wind-down triggers could lead to wind-down decisions occurring at the point when financial or non-financial resources may be reduced and time to respond scarce, limiting the firm’s options. Wind-down triggers should be closely linked to the firm’s risk management frameworks and be monitored closely particularly during times of stress.