Wind-down planning: the ever increasing focus from the PRA and FCA

Regulatory scrutiny of adequate wind-down planning arrangements continues to evolve across all sectors overseen by FCA supervision. Although wind-down planning has been a core part of the FCA’s regulatory toolbox for some time, there has been a notable uptick in focus in recent sector strategy letters. We have also seen a greater level of regulatory intervention when the FCA has considered a firm’s wind-down planning to be deficient, such as imposing capital add-ons for investment firms following a SREP or delaying the authorisation process for electric money institutions and other FCA-solo regulated applications.

Figure 1: Recent FCA portfolio letters referencing wind-down requirements

FCA firms should therefore, give particular attention to the adequacy of their existing arrangements relative to the regulator's evolving expectations, as previous arrangements may no longer be sufficient. Note however that the increasing regulatory focus on orderly wind-down is not limited to the FCA. There is also an increasing PRA focus for non-systemic banks and insurers with requirements for new-bank authorisations already well established. We have also observed emerging interventions with some EU regulators (e.g. BaFIN). To support future planning, PRA firms and relevant EU/ cross-border financial institutions could look to the FCA’s approach and supervisory actions as an indicator of potential future requirements.

Figure 2: Summary of FCA wind-down publications

What is the goal for wind-down planning?

Wind-down planning is a crucial part of the FCA’s supervisory approach and its requirements are set to provide comfort that a firm in distress could exit the market in an orderly and solvent fashion, mitigating potential customer harm. Consequently, the FCA (and the PRA for new banks) places significant focus on wind-down planning during the new firm authorisation process.

What are the common pitfalls to avoid in the WDP process?

Where the regulator has identified material deficiencies in a firm’s Wind-Down Plan, we have observed the root cause is typically in the firm’s underlying process for assessing and developing its wind-down arrangements. Some common pitfalls that we have observed in the planning process include:

• A lack of an end-to-end process plan with clear deliverables/milestones that are agreed at the start of the process;
• An unrealistic timeframe is set for the development and/or refresh of the Wind-Down Plan;
• A lack of training provided to key stakeholders within the business regarding the purpose of wind-down planning and relevant regulatory requirements; and
• Attempts to develop a Wind-Down Plan in silo by one function (typically the second line) with little buy-in, input or challenge from the wider business.

Key observations on WDP documents

As the FCA’s expectations have evolved over the past 12-18 months, we have observed a number of firms failing to meet current (and previous) baseline expectations, with an increasing frequency of regulatory intervention. Some key observations include:

• Wind-down triggers: Many firms have not yet developed appropriate quantitative wind-down monitoring metrics and triggers, or struggle to demonstrate the credibility of their metric calibration and early-warning arrangements.
• Wind-down scenarios: Some firms have based their Wind-Down Plan on a strategic exit rather than a stressed scenario, whilst other firms have not considered a complete range of plausible wind-down scenarios. For example, a scenario triggered by group risk is often overlooked by many firms that are part of a wider group.
• Operational plan: The credibility of wind-down operational plans is typically undermined due to a lack of sufficient granularity and unrealistic delivery timelines.
• Testing: An ever increasing regulatory expectation is for Wind-Down Plans to be tested to demonstrate their operability (for example, via a fire drill). It appears many firms are struggling in this area with a lack of assurance that key elements of the plan could be successfully executed.
• Financial adequacy: In some cases, firms have only focused on an assessment of the capital required for wind-down and have failed to independently assess their liquidity requirements.

How can Deloitte help?

Given the recent increase in regulatory scrutiny, all firms should consider whether their existing wind-down planning arrangements are aligned to current regulatory expectations, including the FCA’s overall objective of harm mitigation.

• For firms with existing Wind-Down Plans, Deloitte can help with a targeted assessment of existing documentation against the FCA’s expectations, conduct a broader examination of the robustness of the underlying wind-down planning process or support in delivering required enhancements.
• For firms who are required to develop a Wind-Down Plan for the first time, Deloitte has significant experience in helping firms digest and meet regulatory standards. This includes supporting and coordinating the end-to-end process or contributing to specific elements (such as the delivery of required training sessions, facilitating wind-down workshops or advising on key steps in the process).  

If you would like to discuss the regulators’ expectations/your requirements further or attend our forthcoming industry roundtable, please contact any author of this blog.