RegulationApr 11 2022

FCA says 'substantial gaps' remain in firms' wind-down plans

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FCA says 'substantial gaps' remain in firms' wind-down plans

The Financial Conduct Authority said there remain “substantial gaps” in many firms’ wind down plans, processes and risk management frameworks.

In its thematic review into the issue, published today (April 11), the FCA said many firms’ wind down plans remained at an early stage of maturity and did not reflect the minimum expectations highlighted in its wind-down planning guidance.

It said: “We expect all wind-down plans to be credible, operable, and to minimise harm. To achieve this, firms must ensure the availability of sufficient financial and non-financial resources during the wind-down process. 

“We recognise that part of the purpose of financial resources is to ensure an orderly wind-down, and a firm should consider whether its financial resource assessment reflects this.”

The FCA said firms should embed wind-down planning into their risk management framework and identify what is required to make their wind-down planning credible and operable. 

“We have observed that ‘testing’ of the wind-down plan is necessary to show its operability and credibility to the firm’s board,” it said. 

As part of its review, the City watchdog said it had found "inadequate" consideration given to the effects of being part of a wider group or being reliant on the technology from a parent or third party.

The FCA said: "For many UK firms, interconnectivity is fundamental to their operating model, which can create complexity in a wind-down."

It found liquidity issues arising during a wind-down can be broadly categorised in three ways, all of which should be considered by firms when quantifying the liquidity required.

These include: cashflow timing mismatches, net cash impact of wind-down and starting wind-down from an already stressed cash position. 

For cashflow timing mismatches, firms must have the ability to fund any temporary mismatches which occur during wind-down, some of which it said can be very significant for certain business models. 

The FCA said: “We have observed that even though a firm may be net cash positive over the entire wind-down period, it can experience significant cash timing mismatches during wind-down.

"As an example, investment brokers may be responsible for funding temporary mismatches arising from facilitating the end of clients trading activity, where there may be several days gap between the timing of funds paid out to clients and those received from exchanges or counterparties.”

For net cash impact of wind-down, firms should assess whether the firm is likely to be net cash positive or negative at the end of wind-down once the total cost of wind-down and the realisable value of its assets are taken into account. 

The FCA said to ensure adequate liquidity is available at the point of wind-down, firms may need to complete granular cashflow modelling exercises.

“We saw that many firms completed a brief analysis which lacked the detail we would expect. This created a risk that the firm may have a bigger wind-down liquidity need than suggested by its analysis.”

Last week, the regulator said it would “act faster” to remove firms who do not meet its minimum standards for consumer and will improve its capacity to intervene when firms can’t meet threshold conditions.

In its business plan, the FCA said it will focus further on removing or sanctioning firms which can’t or won’t meet standards.

The regulator said it wanted firms to meet their financial resource requirements so they can conduct business, wind down and, where applicable, fail without causing significant harm to consumers and market participants.

sonia.rach@ft.com

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