The FCA thematic review on wind down planning

Overview

The FCA have published a Thematic Review, TR 22/1 (Link), on the 11 April 2022. This has highlighted a widespread weakness amongst firms’ wind-down planning, as well as a need to improve processes and planning documentation.

The review showed that Risk Management Frameworks remained at their early stages of maturity, with some containing substantial gaps and many failing to reflect the minimum requirements as outlined in the FCA’s Wind-Down Planning Guidance (WDPG) and ‘Our framework: assessing adequate financial resources’ (FG20/1). It encourages firms to fully embed their wind-down planning into their risk management framework.

The FCA emphasised that firms needed to:

• Undertake “significant” work to ensure their ability to comply and be operable. Specific areas highlighted include cash flow modelling (especially in stressed conditions) liquidity, inter-group dependency and wind-down trigger calibration;
• Consider the implications of liquidity needs on their assessment of resource adequacy, risk appetite and point of non-viability; and
• Improve on intragroup dependencies with responsibilities and reliance clearly outlined in wind-down planning documentation. Firms are encouraged to use wind-down planning testing more, a way the FCA sees as the “best” way to demonstrate effective planning to Boards and the regulators.

Key themes

Liquidity

• Firms were seen focusing on capital whilst overlooking liquidity. The FCA states that they should assess whether their liquidity requirements are realistically substantial enough to support a wind-down. The FCA also encourages firms to consider whether cash should be ring-fenced, specifically to cover a wind-down and whether separating BAU and wind-down cash flows would be beneficial.
• Mismatches in cashflow timing, the net cash impact of wind-down and the impact of pre wind-down risks on the cash balance at the start of wind-down were all cited as areas of concern, with firms frequently misidentifying or misjudging the levels of liquidity required to meet certain costs. All inflows and outflows throughout wind-down should be clearly assessed, including daily/weekly monitoring where relevant (e.g. at the start of wind-down) and consideration should be given to a stressed starting point for liquidity.

Intragroup dependencies

• Firms should adequately cover all entities within a Group and focus on governance (roles & responsibilities within and across entities), operational wind-down plan (including where not all entities wind-down where appropriate) and assessment of the impact of harm
• Most firms including this were seen focusing on the positive elements of such intragroup relationships without giving enough thought to the negatives, such as parental failure.
• It was acknowledged that, while interconnectivity of entities was crucial for some firms’ business models, this creates complexity in a wind-down that must not be overlooked. Firms require a clear understanding of the implications of each interdependency, regardless of complexity, for their wind-down plans to be adequate. This is particularly prominent where firms also have overseas operations.
• Consideration should be given as to whether having an established Group Service Company would be beneficial.

Wind-down triggers

• Firms will need to have sufficient resources to undertake a wind-down when these triggers are reached and many firms have failed to adequately factor this in when calibrating wind-down trigger metrics. Often, the wind-down trigger is too late and resources are already exhausted.
• Some firms did not consider a quantitative threshold for wind-down triggering, instead using qualitative scenarios, and some demonstrated a mismatch between triggers and the firm’s BAU risk appetite.
• Firms who did well in this area were seen to, for example, consider a range of triggers and ways in which they interact, as well as complete granular reverse stress testing.

Devlin Mambo Insights

The FCA have a continued clear focus on liquidity and the need to fully embed this into the wind-down planning process. Amongst other items, they have specifically commented on the need for firms to consider the following:

• Embedding their wind-down planning into their risk management framework
• The impact of non-regulated firms
• Ring-fencing liquidity specifically for wind-down and considering assessing BAU and wind down cash separately
• Stressing the cash starting point for wind-down and consider daily/weekly cash flow monitoring even at the start of wind-down
• The implementation of a Group Service Company
• The interaction between wind-down triggers and other risk triggers

Devlin Mambo have significant experience in the creation, development, and assurance relating to wind down planning. Firms are encouraged to consider all these factors in their current wind-down planning.  For further information, please contact cathy@devlinmambo.com or your usual relationship contact.