Wind-down planning and liquidity thematic review

On 11 April the FCA published the results of their Thematic Review on wind down planning across various business models, which focused on liquidity needs during wind-down, intra-group dependencies and wind-down triggers.

The review identified a number of gaps and a general need for ‘significant further work’. For some time now the FCA have been prompting firms to align their wind-down planning and liquidity management processes to the regulatory standards in the WDPG sourcebook and the guidance in FG 20/1. These regulatory references are well known, and outline the FCA’s expectations very clearly and should not be neglected only because they rank as guidance rather than rules.

As an overarching obligation under Threshold Condition: COND 2.4, all firms must hold sufficient liquid assets to be able to meet their liabilities as they fall due at all times, and also hold adequate financial and non-financial resources to enable an orderly wind-down.

The FCA expects all wind-down plans to be credible, operable, and to minimise harm. Firms are expected to have a fully documented analysis of all required actions that will be taken during wind-down, governance arrangements and an assessment of the impact on all stakeholders and other group entities. For firms to complete wind-down planning as a group, adequate coverage of each entity is expected.

Liquidity in wind-down

The FCA has found that liquidity needs are not always considered by firms in their wind-down plans. Firms should consider having a detailed cashflow breakdown in the wind down financial analysis to identify ordinary and extraordinary expenses, initial and total cost of wind down and an assessment of a pool of liquid assets to be held and ring-fenced specifically to complete an orderly wind-down.

Three liquidity issues are categorised from quantifying the requirement:

Cashflow timing mismatches - Firms must fund any temporary shortfalls during wind-down by including a time horizon in the projection.
Net cash impact of wind-down - Firms must assess the net cash impact at the end of wind-down by correctly identifying and calculating costs.
Starting wind-down from an already stressed cash position - Firms must assume stressed scenarios for the starting cash position.

To quantify liquidity requirements, the FCA stressed the need of establishing a complete granular cashflow modelling. Firms are expected to analyse Business-as-Usual and wind-down inflows and outflows over a hypothetical implementation period to identify cash mismatches.

Intragroup dependencies

The FCA also found that most firms in their sample have not given sufficient consideration to the impact of Group membership on the regulated firm’s ability to wind-down, including potential stress events such as parental failure. Firms with interconnectivity that is fundamental to their operating model are expected to consider financial and operational interconnectedness, contingent financial support and credible arrangements to mitigate the reliance on Group financial resources.

Wind-down triggers

A third aspect that the FCA has identified, most firms failed to consider an appropriate range of wind-down trigger metrics or triggers were not sufficiently justified. Triggers are expected to be based on financial and operational metrics that are supported by an appropriate rationale, and are linked to risk management frameworks and monitored during stress period to identify early warnings or take remedial action to prevent wind down.

The monitoring of wind down triggers also allows sufficient time for a wind-down decision to be agreed internally at a time when firms have sufficient financial and operational resources to complete the process in an orderly fashion, rather than wait until the firm may become insolvent.

This FCA paper will definitely be helpful as it provides examples of good practice and a clear idea of FCA’s expectation for firms to proportionately implement the Regulator’s guidance and observations into their wind-down planning processes.

At BDO we have extensive experience in developing wind-down plans with firms of all types, and have a substantial insight of FCA’s expectations in this area which has acquired greater prominence in the supervisory spectrum.

If you would like to understand more on this particular topic, please get in touch with Giovanni Giro, Associate Director.