The right way to look on the dark-side

Helping firms obtaining FCA authorisation to carry out payment services is one of the most interesting pieces of work that payments consultants get involved in. Why? This is because authorisation is the licence the firm needs to operate, we get to work closely with the firm’s management, helping to develop or critically appraise their business plan, depending on how we are engaged. This is essential to understand and challenge how they’ll make the business a success and help shape the application to meet the Regulator’s strict requirements. There’s a lot of pressure and expectation but also excitement; you get that great sense of achievement, pulling together as a team to reach the common goal.

There’s no denying that the application process is arduous, but my experience tells me that there is one particular component of payments firms applications that quite often pour cold water into the overall enthusiasm in producing the full suite of documents accompanying the application form: the wind-down plan.

In a nutshell, it consists of a playbook to demonstrate that sometime before the moment payments firms’ businesses become no longer viable (by reason of no longer having adequate financial or non-financial resources to carry out its regulated activities), they can make timely decisions and know what to do for the sake of orderly withdrawal from the domestic market. It is a must to design a plan that prevents causing harm to customers, the markets or other third parties, in the event of an insolvency or unexpected crisis.

There is plenty of regulatory guidance released by the FCA on wind-down planning. The sources combined provide a good level of input about minimum requirements and areas to consider when designing the plan, but firms often fall short. What makes it so difficult to draft a robust plan then?

In its March 2023 Dear CEO letter, the FCA raised the following concerns which shine a light on common shortcomings:

• plans which appear over-optimistic about the time it would take to wind-down;
  
• insufficient detail about the steps for winding-down to make the plan practical and usable in reality;
• a lack of consideration of appropriate triggers for winding-down; and
• a lack of adequate analysis of the costs and cash requirements for winding-down.

I have the view that the fundamental reason behind the points above is optimism bias; the inherently human predisposition to maintain positive expectations about a particular event or scenario. We always hope for the best, simply because often hope is what pushes us forward. While firms are looking at the greener pastures and rosy outlooks in their performance forecasts, the FCA wants firms to take a step back and embrace a ‘better safe than sorry’ mentality when drafting their wind-down plan.

These are the top behaviours the FCA expects payments firms to demonstrate when designing an effective and robust wind-down plan:

• Be curious, be challenging – having inaccurate or limited information can lead to distorted conclusions, which will be detrimental to the robustness of a plan. It is key to challenge as much as possible the rationale behind estimates, assumptions, financial and non-financial resource needs, operational implications, ways of returning customers’ funds, impact upon market and expected timings.
• Stay open minded – winding down a payments business is likely to impact more stakeholders than only clients with a direct contractual relationship. Merchant acquirers, for instance, may need to ensure they are still able to support processing of chargeback disputes for as long as necessary. When confident about having it all sorted, it may be prudent to ask for input from an impartial third party.
• Work as a team – drafting a wind-down plan tends to be a very insightful and constructive exercise once the right mindset is triggered, but it requires involvement from the whole firm. As a result, the quality of the plan benefits from diverse insights, points of view and lateral thinking that cannot be achieved by working in silos or excluding parts of the business.
• Take it seriously – wind-down planning is not a box-ticking exercise. It can define the success of an API/EMI application with the FCA, as it is a key component to allow the FCA meet its strategic objectives. This is because reducing harm from firm failure is one of the core objectives of the authority’s 2022-2025 strategy. Inevitably, this means increased scrutiny being placed at the authorisation gateway and, where appropriate, through early oversight. More than ever, planning against the risk of failure is a must.

The standard set by the FCA has reverberated across regulators from overseas. The European Commission’s PSD3 proposal now contains express provisions requiring applicants to include ‘a winding-up plan in case of failure, which is adapted to the envisaged size and business model of the applicant’.

Contrary to what the Commission suggests in the context of safeguarding, for example, the current draft does not expressly anticipate mandating the drafting of regulatory technical for payments firms’ wind-down planning. Similar to what I have observed in the context of strong customer authentication rules, it is possible that EU firms will keep leveraging UK regulatory and guidance sources when drafting their own plans. If EU-specific guidance is released, payments firms operating at both UK and EU markets must pay close attention for the sake of achieving process harmony and efficiency where possible.

The KPMG Payments Consulting team has wide experience helping payments firms navigate the FCA applications process. Our team includes dedicated payments experts who understand payments and can help bring wind-down planning into focus, supported by KPMG’s hugely successful authorisations team (since 2009 as a firm we’ve advised on almost half of all successful bank authorisations).

Should you have any questions or concerns about wind-down planning or FCA authorisation process for payments firms, please don’t hesitate to contact me.