Wind-down planning applies to all Financial Conduct Authority (FCA) solo-regulated firms. The FCA requires all such firms to maintain a wind-down plan, to ensure an orderly and effective wind-down in the event of failure, with minimal adverse impacts on clients, counterparties and the wider market.
The FCA’s recently published Business Plan 2023/24opens in a new tab outlines the FCA’s continued focus on reducing harm from firm failure. A key outcome that the regulator wants to achieve is that firms are able to meet their financial resource requirements so that they can conduct business, wind-down and even fail without causing significant harm to consumers and market participants.
Wind-down planning has also become a significant area of FCA focus through its supervisory work. In the past six months, the FCA has published the results from its multi-firm reviewsopens in a new tab highlighting wind-down weakness for Markets in Financial Instruments Directive (MiFID) investment firms (subject to the IFPR) and to general insurance brokersopens in a new tab. Furthermore, in April 2022, the FCA released a Thematic Review (TR22/1opens in a new tab) which highlighted that most wind-down plans are at an early stage of maturity and have substantial gaps. As a minimum, firms must be able to demonstrate that regulatory expectations highlighted in the wind-down planning guidanceopens in a new tab are met (which was published in 2016).
What does good look like?
Firms should be able to demonstrate that their wind-down plan (“WDP”) is credible, up-to-date, comprehensive and operable.
The key components of an effective wind-down plan are detailed in the diagram below:
- Business background
- Risk management framework
- Governance
- Wind-Down Scenarios
- Impact Assessment
- Operational analysis
- Resource assessment
- Communications plan
- Group interdependencies
What are the key focus areas from the FCA?
The FCA highlighted the following three focus areas in its thematic review on wind-down planning (TR22/1opens in a new tab) published in April 2022:
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Liquidity
Lack of liquidity is a significant driver of harm during a wind-down process; firms must consider how their cash position may change during the period and plan accordingly through detailed cashflow modelling.
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Triggers
wind-down triggers are an essential part of the WDP. An appropriate range of triggers must be considered during the planning process. These should be closely linked to the firm’s risk management framework and be monitored appropriately.
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Group interdependencies
firms should consider the impact membership in a group has on their assessment of wind-down resource requirements. Intra-group reliance is often not considered as part of the WDP, and this creates significant risks for any scenario involving financial or operational pressure on the group.
These gaps have been reinforced by the FCA in its recent publication in February 2023opens in a new tab of initial observations following the introduction of the Investment Firms Prudential Regime (IFPR).
How can KPMG help?
KPMG can help support firms with their wind-down planning activities:
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Performing gap analyses on firms’ wind-down plans;
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Supporting firms to implement wind-down planning documents both for the first time and where significant remediation is required; and
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Working with firms to ensure that wind-down planning is embedded within the ICARA process, including the Risk Management Framework.
