2020 continues to be a challenging year. Nikhil Rathi, the newly appointed CEO of the FCA, in his address to the City Regulators last week, referred to the ongoing impact that the Covid-19 pandemic is having on the financial services sector. Noting the financial hardships faced by some firms, he stated that “sadly, we do expect a significant number of regulated firms, particularly smaller firms, to fail in the months ahead.”
The FCA is unable to intervene in the market to prevent the failure of firms but the regulator is anxious to ensure that if a firm does fail, it makes an orderly departure from the market in a way which avoids or mitigates harm to customers and the financial system.
Contemplating the failure of your business is perhaps something you would rather not think about. Indeed, firms with healthy revenue and profits may think that ‘it will never happen to us.’ However, no firm is infallible and such an attitude can result in a lack of planning and, ultimately, consumer detriment.
The regulator is calling on regulated firms to produce a ‘wind-down plan’ which can be followed if the firm becomes unviable and must relinquish its regulatory permissions. Having a wind-down plan will help the firm determine whether it has adequate resources to wind-down in an orderly manner, thereby protecting the interests of consumers and reducing harm.
In many cases, it is likely that, should a firm need to ‘wind-down’, it will be doing so with limited resources (e.g. lack of funds and staff), so these adverse circumstances should be considered as part of the process.
Even if the firm never has to enact the plan, all firms should engage in ‘wind-down planning’. This is a process through which a firm’s governing body (e.g. its board of directors) identifies the things it needs to do to ‘wind down’ the business. It involves evaluating and managing the risks that a departure from the market would bring. The Board may wish to delegate this planning process to a specific individual or team, but the governing body retains ultimate responsibility.
When preparing a wind-down plan, the following should be considered:
- Scenarios that could lead to a firm being unviable. For example, what would happen if there was a major economic recession? What would happen if the firm lost one or two major clients? What if a cyber attack resulted in a long-term outage of critical ICT infrastructure?
- The types of management information required to alert managers to emerging risks and ensuring that an effective risk monitoring system is in place.
- A clear, step by step plan to implement an orderly wind-down. What needs to be done and by whom? The wind-down process does not end until the FCA cancels the firm’s Part 4A permission.
- Assessment of the financial and non-financial resources necessary to ensure an orderly wind-down. Remember, resources can include capital, liquidity, knowledge, and personnel.
- Processes for proactive identification of risks that would prevent or hinder an orderly wind-down or lead to significant consumer or market detriment
The wind-down plan should be presented as a formal, written document and approved by the governing body. It is a ‘living document’ which should be reviewed regularly and updated accordingly.
This is about planning for the worst-case scenario and it is hoped that firms will not find themselves in this position. That is why, in addition to wind-down planning, firms should also put in place measures that build operational resilience, such as business continuity/disaster recovery plans and effective risk management systems. Early or preventative measures can sometimes help prevent a wind-down scenario from materialising in the first place.
If you require further support around operational resilience, business continuity or wind-down planning, please contact your RWA Business Manager.