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2 November 2022

If your wind down planning was scrutinised, would it meet the FCA’s expectations?

Reducing harm from firm failure is one of the regulator’s main focuses at the moment. It requires you to have an adequate action plan in place that would enable trading to cease with minimum disruption, regardless of whether it is a strategic exit or crisis situation.

During Covid, the FCA noticed a pattern of inconsistency in the way insurance brokers approached their assessments of liquidity for an orderly wind down. So, at the beginning of this year, it began a review of ten firms to better understand how they were approaching wind down planning and provide specific feedback to the sector.

This is not the first time concerns have been raised regarding regulated firms’ wind down plans. Last year, the FCA’s thematic review of authorised fund managers found that wind down planning was inadequate and, in some cases, non-existent.

Although this more recent study focused on insurance brokers, the findings are relevant to most regulated businesses and you are encouraged to consider its recommendations when you update your wind down plan.

Why is effective wind down planning important?

A disorderly wind down has the potential to cause significant harm, through loss of client money and loss of confidence in the sector if services cannot be replaced easily or the firm in question does not pay any redress.

The FCA sees effective wind down planning as essential to minimise the adverse impact on clients, as it allows you to assess if you have adequate resources to handle the process in an orderly manner, for example, capital liquidity, knowledge and staff.

Mixed results came from the review of insurance brokers. It looked at firms’ risk management frameworks, stress/reverse stress testing and underlying modelling assumptions and found that most of those surveyed had wind down plans in place, but few could demonstrate consistently good practise.

As a minimum, all regulated firms should have an up-to-date plan in place that demonstrates a comprehensive understanding of the likelihood that a wind down may be triggered and what harm it could cause.

Rules governing your wind down plans

There are various FCA rules and guidance notes that relate to winding down a regulated business and you should familiarise yourself with them when reviewing any plans you have in place.

  1. You must comply with the Threshold Conditions in the FCA handbook. In particular the requirement that you have adequate resources to cover the activities you carry out.
  2. The Principles for Business stipulate you must maintain adequate financial resources to enable a wind down.
  3. Review the Wind Down Planning Guide and ensure your arrangements are structured appropriately, taking into consideration the nature of your work, size and complexity of your business model.
  4. The FCA handbook contains other relevant rules and guidance. Use them to assess the credibility of your risk management and wind down planning.

Poor practises

The review of insurance brokers found a number of poor practises in place that were deemed to reduce the credibility of the firms’ own assessments of liquidity. They included:

  • Inconsistent or incoherent reporting of risks
  • Lack of information on how to assess the effectiveness of risk monitoring and mitigation
  • Failure to assess the relevant risks to inform stress/reverse stress testing
  • Limited detail in cashflow modelling and the assumptions made within it
  • Insufficient prudence in the assumptions underlying cashflow modelling
  • Insufficient consideration of the harm wind down could do and the ways to minimise it.

What next?

Do you have a wind down plan? If so, does it still reflect your current circumstances? Do you stress test it, or know what scenarios would prompt your firm to have to wind down?

If you can’t answer these questions confidently, it is time to undertake a review and consider if your plan would meet the FCA’s expectations, set out in the Wind Down Planning Guide.

A wind down plan should be a living document that is refreshed periodically and when any significant changes take place within your business. For more information about drafting or reviewing an existing plan, don’t hesitate to contact us on (0161) 521 8641 or email: info@b-compliant.co.uk

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