FCA Regulated Firm – Wind-Down Plan: Insolvency

Begbies Traynor is a specialist in providing advisory, insolvency and restructuring advice to FCA regulated firms and businesses within the financial services sector. We have supported nearly 150 firms from the sector over the past two years. Our specialists can assist and support senior management of FCA regulated firms  to understand their directors’ duties and what they must not do if the firm becomes insolvent.

What is a wind-down plan?

FCA regulated firms are required to have a wind-down plan.  This is a plan that considers what events would be likely to make a regulated firm no longer viable and sets out how a firm will avoid a disorderly failure.

What is the purpose of a wind-down plan?

The objective of wind-down planning is to help to reduce the risk of negative effects on consumers and market participants when a firm winds-down its regulated business either solvently or insolvently.

When is a wind-down plan used?

A wind-down plan can help a firm to assess if it would have adequate resources (e.g. capital, liquidity, knowledge and people power) to wind-down in an orderly manner, especially under challenging circumstances.

Failure of a firm could occur suddenly. Without proper advance planning, a firm running into difficulties has an increased likelihood of a disorderly wind-down, potentially leading to consumer detriment and/or adverse effects in the market.

How often should I review my wind-down plan?

A wind-down plan is meant to be a living document, reviewed and worked on periodically as regulations and challenges to business evolve. Firms should have a wind-down plan ready to call upon.

When would a firm no longer be viable?

A firm that does not have adequate financial or non-financial resources to carry on its regulated activities may no longer be viable.  Firms may want to consider what events would be likely to make it no longer viable, which is often referred to as reverse stress-testing. This could happen for a variety of reasons, including:

• Significant financial losses with no signs of timely recovery
• Loss of key clients without a realistic prospect of their replacement in good time
• Loss of critical infrastructure with no signs of timely recovery
• The emergence of significant redress claims which the firm is unable to meet
• Reputational risks

   ·       Cloning

   ·       Failing to treat customers fairly

   ·       Fundamental failure to follow Client Assets Sourcebook

   ·       Public censure

• Cyber resilience has been compromised
• Fundamental compliance failure leading to regulatory action

   ·       fines

   ·       intervention

   ·       warning notice

   ·       supervisory notice

   ·       censure

   ·       skilled person review - s165 / s166 Financial Services and Markets Act (FSMA)

   ·       voluntary requirement (VREQ)

   ·       obligatory requirements (OIREQ)

• Breach of ICARA / Capital Adequacy Requirements
• Litigation and other costs which the firm can no longer meet
• Removal of FCA authorisations / permissions and inability to continue to undertake regulated activity

What happens if a regulated firm become insolvent?

It is the responsibility of senior management to monitor the firms solvency on a regular basis.

Firms should inform the FCA as soon as there are signs of a potential failure or any other causes for winding-down, as well as of the actual wind-down decision. Early engagement with the FCA will help to deal with relevant regulatory issues.

Begbies Traynor can assist senior management to understand directors’ duties and what they must not do if the firm becomes insolvent.

A wind-down plan can also help a firm to assess if it would have adequate resources (e.g. capital, liquidity, knowledge and manpower) to wind-down in an orderly manner, especially under challenging circumstances.

What should a wind-down plan include?

The following list is not exhaustive, but an effective wind-down plan typically includes the following components:

• Scenarios that could lead to firm no longer being viable
• Plan to steer firm to wind-down its business in an orderly manner
• Assessment of resources – both financial and non-financial – to support wind-down
• Processes to avoid material risk
• Details of key suppliers, people and their contact details
• CASS Resolution Pack
• Assessment of liabilities and key contracts
• Projected financial position over the period and estimate of the costs to wind-down
• Customer communications strategy
• Complaint and redress resolution procedure
• Asset migration strategy
• Data retention and resilience strategy
• Employee retention
• Defaults impacting on cashflow. This may have consequences on anticipated revenues and costs, and the duration and/or impact of the wind-down.
• Creditor supplier reaction - trigger reactions such as margin calls or demands for full and final payment.
• Plan to cancel Part 4A permissions to complete the wind-down process

Failure of a firm could occur suddenly. Without proper advance planning, a firm running into difficulties has an increased likelihood of a disorderly wind-down, potentially leading to consumer detriment and/or adverse effects in the market.

A wind-down plan is different to the business continuity plan firms are required to submit as part of the authorisation process.

Should firms be proactive in their wind-down planning approach?

Wind-down planning is not just about the events during the wind-down period. It also includes what precedes the actual wind-down process. In particular, as wind-down can be triggered by a range of scenarios, firms that proactively identify and monitor key management information, relevant metrics and early warning indicators are likely to be better prepared. It can also support more effective decision making and, where appropriate, timely initiation of the wind-down plan if needed.

Who is responsible for preparing and implementing a wind-down plan?

Given the significance of wind-down planning, senior staff and the governing body of a firm is most likely to be accountable for it, with appropriate engagement of relevant experts across the firm and, if required, externally.

Begbies Traynor can help firms improve their understanding and management of key wind-down issues/scenario.

How do I monitor trigger events which may need me to consider using the wind-down plan?

A firm may consider setting thresholds for relevant management information (e.g. profitability, capital adequacy, liquidity), so that if the data shows breaches of those threshold values it can trigger a report to senior management and prompt thinking on the next steps.

It is imperative firms have good dashboard management with robust procedures to check the accuracy of data supplied to senior management and the firms governing body.

I don’t have a wind-down plan, what do I do?

It is not too late to prepare a wind-down plan. If you do not have a wind-down plan in place we strongly encourage you to begin to prepare one. Begbies Traynor will be happy to assist you.