Broking Business – Winter 2021
Regardless of size, all companies must have a wind-down plan. Paul Goldwin explains how they can.
The FCA published it’s ‘Wind-down Planning Guide’ in April 2021 following it’s engagement with the market through it’s COVID-19 Impact Surveys and their concerns about the overall financial resilience of the insurance intermediary market. The regulator recognises that firms with weak financial resilience will fail. They note that solo-regulated firms aren’t individually systemic and therefore their prudential regulation is focused to ensure that a failure is contained. However, if a firm does fail, either as a result of a strategic decision to leave the market or an unexpected event due to a particular crisis or insolvency, it must do so without causing harm to consumers, markets or the wider economy.
An effective wind-down plan aims to enable a firm to cease its regulated activities and achieve cancellation of its regulatory permissions with minimal adverse impact on its clients, counterparties or the wider market, either as a result of a strategic decision to exit the market or an unexpected event.
There are various popular misconceptions about wind-down plans and we’ll try to set the record straight here:
- A wind-down plan applies to all regulated firms, not just those that may be in financial distress. The FCA takes the view, as the pandemic has proved, that things can change overnight. That’s why every firm must have a plan for an effective wind down.
- There’s no set template or pro-forma to follow to ensure compliance with the FCA’s guidance, however most wind-down plans will have four main components:
- An evaluation of the scenarios or trigger event(s) that could lead to a firm being no longer viable, ensuring that you select the one that’s most realistic to your own circumstances to facilitate the modelling of the wind-down scenario.
- The construction of an overall plan to steer the firm in an orderly manner once leaving the business has been either voluntarily decided or been rendered unavoidable.
- An assessment of the financial and non-financial resources required to support an orderly wind-down process.
- An identification of the processes for proactively identifying and mitigating any material risks or obstacles to an orderly wind down.
- The wind-down planning exercise isn’t a task to be simply delegated to the finance department. It requires the acceptance, involvement and approval of the firm’s governing body, with a nominated person ensuring the plan is periodically reviewed as to its adequacy and remains current and relevant to the firm’s operations
What does a wind-down plan look like in practice?
Most wind-down plans we’ve seen consist of two main parts:
- Financial projections supported by detailed assumptions and modelled over the chosen wind-down period, driven by the initial trigger event and identifying the TC 2.4 buffer required to ensure that the firm has adequate financial resources to wind down its business in accordance with its chosen plan. This will be periodically refreshed as circumstances and business activity change, enabling the firm to hold the TC 2.4 buffer at all times in a segregated account for wind down purposes.
- A detailed narrative that sets out the operational logistics of how the orderly wind-down plan will be carried out; addresses all the financial and non-financial risks; and typically contains separate sections on arrangements with:
- Employees
- Clients and counterparties
- Suppliers and landlords (dealing with leases)
- Assessing infrastructure requirements during wind down
- Dealing with client monies and custody assets
- Establishing a communication plan to deal with stakeholders on wind down
- Anticipating reactions – and how you’re going to deal with them.
In practice, we’ve found that firms are good at producing the financial numbers but less adept at preparing the detailed narrative plan. The FCA is clear that these go hand-in-hand and without a well-constructed and regularly updated ‘living document’ that has been properly followed, they’ll not be minded to grant your firm the cancellation of its regulatory permissions when the time comes.
A wind-down plan is therefore not a ‘nice to have’, but very much an integral part of a firm’s armoury of documents that’s necessary to see it through its life cycle.
