Wind-Down Plan Testing – staying ahead of regulatory scrutiny

Wind-down planning requirements have been top of the prudential agenda in recent years, with new requirements due to take effect for PRA firms (banks and insurers) and a continued focus by the FCA on the solo-regulated sector. For investment management and wealth firms, the FCA has recently been focusing its supervisory engagement on the credibility and operability of Wind-Down Plans (WDP).

Testing the operability of a WDP

Demonstrating the operability of a WDP is now an emerging expectation of the FCA that is evident through recent rounds of IFPR/ SREP feedback. Whilst in the past, the aim of the FCA’s supervisory reviews may have focused on the adequacy of the design of a firm’s wind-down planning process, there is an increased focus on assessing operability. SREP feedback and remediation actions on this matter could include:

• The development and delivery of a ‘fire drill’, ‘dry run’ or other simulation exercise to demonstrate the operability of the WDP;
• A requirement placed on the Chair or CEO to attest that the WDP is fit-for-purpose for facilitating an orderly wind-down;
• An action placed on Internal Audit to review the credibility and operability of enhanced WDP arrangements; and
• Where operability is not demonstrated or where wider concerns may exist, the FCA could take further action or intervention, such imposing capital add-ons or governance scalars.

Whilst the FCA expects firms to test the operability of their WDP, currently there is limited prescriptive regulatory guidance on how to scope, design and deliver such a test. However, based on industry activities and regulatory feedback to date, there are a number of emerging good practice steps and approaches which firms can consider. Key considerations are outlined in the infographic below.
 

Firms with a clear outline of end-to-end testing arrangements have been able to break down the WDP into specific elements (with prioritisation) to help meet the FCA’s expectations in a more manageable manner.

Efficient testing: leveraging existing processes

To avoid duplication and inefficiencies, some firms have looked to leverage existing and overlapping processes within their WDP testing arrangements. For example, within the ICARA requirements, firms will already have a Recovery Plan (and sometimes a Contingency Funding Plan) that would be leveraged in the event of a stress (and ahead of the invocation of the WDP). Depending on the level of maturity of the Recovery Plan, there could be a degree of overlap in elements of governance, risk appetite framework and stakeholder impact/communications.

However, some firms have looked to leverage processes that sit outside the ICARA in support of their WDP testing objectives. This has included:

• The overlap with Operational Resilience requirements;
• The use of Business Continuity Planning arrangements; and
• Third-Party Outsourcing and Risk Management processes.

Where firms are able to integrate the testing of overlapping processes into a single, holistic approach, the value-add of testing can be significantly enhanced.

Value-add: the benefit of testing

Rather than approaching WDP testing as a tick box exercise, an effective testing regime can bring genuine additional value to the management of the business. We have observed firms deliver genuine enhancements following a WDP test that could make the firm more resilient to future shocks. For example:

1. Well-designed tests that are focused on governance and decision-making can identify potential synergies in BAU governance and framework arrangements, and also facilitate a better understanding of likely triggers for management stretch.
2. Testing of a firm’s Early Warning Indicator framework and associated Management Information can help firms to refine the calibration of monitoring metrics and improve the quality of Board reporting (to help facilitate more efficient decision-making).
3. For firms that are part of a wider group, the WDP testing can often lead to the identification of additional procedural steps and shareholder agreement conditions that can benefit and enhance subsequent strategic initiatives and service agreement discussions.

Other tangible benefits from effective WDP testing include enhanced insights into operational plan adequacy, function-by-function readiness, communications and surge demand preparedness and client/ third-party offboarding capabilities.

Next steps

Currently the FCA has not provided prescriptive guidance on how to test a WDP. Therefore, firms have a clean slate to design their testing arrangements in a manner that adds value to the business and is practical, whilst incorporating the FCA’s broad harm mitigation objectives. Where firms have taken proactive ownership of the design of their annual testing arrangements, we have observed valuable enhancements have been identified and delivered.

If you would like to discuss your WDP testing needs further, then please speak to any author of this blog.