TR22/1 – Thematic Review: Observations on wind-down planning

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.

Liquidity

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

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.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

For information. ATEB can assist firms in creating robust risk management and wind-down plans.

Action Required By You

The FCA is encouraging firms to review the observations and consider incorporating these into their own wind-down planning processes and documents, in a way that is proportionate to the nature, scale and complexity of the firm’s activities.
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About the Author

John is Chartered Financial Planner and a Fellow. With a wealth of financial services experience, including as a successful adviser, John is a long standing ATEB consultant, with a proven track record of delivering robust compliance and T&C solutions across all regulatory disciplines.

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