Wind-Down Planning

Why is wind-down planning important?

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 2023/24 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 reviews highlighting wind-down weakness for Markets in Financial Instruments Directive (MiFID) investment firms (subject to the IFPR) and to general insurance brokers. Furthermore, in April 2022, the FCA released a Thematic Review (TR22/1) 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 guidance are met (which was published in 2016).

Steven Hall

Partner, Financial Risk Management

KPMG in the UK

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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:

1. Business background

2. Risk management framework

3. Governance

4. Wind-Down Scenarios

5. Impact Assessment

6. Operational analysis

7. Resource assessment

8. Communications plan

9. Group interdependencies

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Business background

An overview of the business strategy and business model to provide context for the overall plan.

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Risk management framework and management information

An overview of the risk management framework, covering the processes for monitoring harms and wind-down triggers/thresholds.

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Governance

An explanation of the ownership of the WDP document, the mechanisms to invoke the plan and details of the governance points in this process.

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Wind-Down scenarios

The FCA expects a stressed backdrop to be used to develop a WDP. Therefore, both a description of the scenario design process and the scenario which has been used must be presented in the plan. The FCA expects firms to validate this using reverse stress testing.

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Impact assessment

An assessment of potential harms to different stakeholder groups from wind-down (clients, markets and the firm itself) and the planning/mitigants in place to minimise impacts.

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Operational analysis

An explanation of the step-by-step key activities to wind-down the business across all functions, ownership of these activities and dependencies. This should be based on the stressed scenario.

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Resource assessment

A detailed analysis of the financial and non-financial resources required for wind-down. This should be based on the both the impact assessment and operational analysis. Financial resource assessments are expected to include detailed cashflow analysis.

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Communications plan

A plan which sets out the communications approach with different stakeholder groups and how these are governed throughout wind-down. This should be linked to the impact assessment and operational analysis.

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Group interdependencies

An assessment of group interdependencies, and how these dependencies have been mitigated in the plan.

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 (TR22/1) published in April 2022:

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.
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.
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 2023 of initial observations following the introduction of the Investment Firms Prudential Regime (IFPR).

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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.

How can KPMG help?

KPMG can help support firms with their wind-down planning activities:

Performing gap analyses on firms’ wind-down plans;
Supporting firms to implement wind-down planning documents both for the first time and where significant remediation is required; and
Working with firms to ensure that wind-down planning is embedded within the ICARA process, including the Risk Management Framework.