WDPG 3.5 Making a decision to wind-down

In the event of a severe stress, a firm may have one or more potential options that might enable it to recover and return to a viable position, for example, finding potential investors to acquire or invest in the failing business. However, in spite of management actions, there may be no effective way to recover from a severe stress; at that stage consideration of the wind-down plan becomes relevant.

The firm’s governing body will need to make a formal decision to wind down in a timely manner. The wind-down plan can help the firm’s governing body evaluate how viable any potential recovery options are against the risk of a disorderly failure if the decision to wind down is delayed or deferred for too long.

Establishing clear indicators and thresholds can help a firm’s governing body to make timely decisions. The governing body can also refer to the firm’s wind-down scenario analysis to provide an indication of the minimum financial and non-financial resources needed to ensure the orderly winding down of the firm’s activities. Deferring the wind-down decision to a point where that level of resources is no longer available would significantly increase both the risk and scale of a disorderly failure.

Firms may identify what regulated activities they will cease once the wind-down decision is made. For instance, a firm should not normally take on any more new clients once that decision is made.

We remind firm’s senior management that they need to be aware of their directors’ duties and what they must not do if the firm becomes insolvent.

Before the governing body takes the decision to wind down, it may find it useful to check that:

1. (1)

   the wind-down plan is up-to-date; and

2. (2)

   the firm’s compliance with basic regulatory requirements.

If the governing body takes the decision to wind down, we would recommend allocating a person or group within the senior management team with the role of coordinating, directing and implementing the wind-down process and ensuring prompt dissemination of information relevant to decision-making at the governing body level. Many elements of these governance, oversight and operational arrangements can be established, in principle, in advance as part of a firm’s wind-down planning.

Firms should inform the FCA as soon as there are signs of a potential failure or any other causes for winding down, as well as of the actual wind-down decision. Early engagement with the FCA will help to deal with relevant regulatory issues. They should also consider whether to start communications with various stakeholders (see WDPG 4.2 (Communications plan)).

[Note: See also Principle 11 (Relations with regulators) (PRIN 2.1.1R).]