1Wind-down planning is a process in which the firm’sgoverning body:

1. (1)

   identifies the steps and resources it needs to wind down its business, especially in a situation where resources are limited; and

2. (2)

   evaluates the risks and impact of a wind-down and considers how to mitigate them.

The objective of wind-down planning is to help to reduce the risk of negative effects on consumers and market participants when a firm winds down its regulated business.

The following list is not exhaustive, but an effective wind-down plan typically includes the following components:

1. (1)

   The scenarios that could lead to a firm no longer being viable, adequate governance processes, management information monitoring and other control processes to support timely wind-down decision making.

2. (2)

   A plan to steer the firm to wind down its business in an orderly manner once exiting the business has been voluntarily decided or rendered unavoidable by external circumstances.

3. (3)

   An assessment of the resources, both financial and non-financial, that are needed to support an orderly wind-down.

4. (4)

   Processes for proactively identifying and mitigating any material risks or obstacles to winding down in an orderly manner, (e.g. issues that could lead to significant consumer detriment, or create a significant adverse impact to the financial market(s) or other third parties).

The end product of this process is a documented wind-down plan that is approved by the firm’sgoverning body, with a nominated person ensuring it is periodically reviewed as to its adequacy and remains current and relevant to the firm’s operations.

A wind-down plan is meant to be a living document, refreshed periodically and after any material change in business/operating model (e.g. addition of new major business line). It is good practice for the governing body to approve every material revision.

We know that some firms may have carried out similar planning exercises under different but related regulatory processes (e.g. ICAAP, the ICARA process3). This guide does not replace or re-interpret those processes. However, firms may want to take this guide into account to further strengthen their wind-down planning as well as to consider how consistent these processes are with one another.

[Note: the ICARA process is the process that MIFIDPRU investment firms are required to comply with under MIFIDPRU 73.]

2 2

Q1: If a firm is running normally and is generating revenue/profits, would wind-down planning be of any relevance?

Yes. There is no guarantee that a normally functioning firm will not fail in the future. Failure of a firm could occur suddenly. Without proper advance planning, a firm running into difficulties has an increased likelihood of a disorderly wind-down, potentially leading to consumer detriment and/or adverse effects in the market.

Q2: What is the difference between business continuity planning (BCP) and wind-down planning?

Most firms would have been asked to submit a description of business continuity plans as part of the authorisation process. BCP focuses on the firm’s ability to continue to function or recover despite unforeseen physical and/or technical interruptions to its business. The firm’s underpinning assumption is that it will continue to carry on its activities and so BCP focuses on resilience.

On the other hand, wind-down planning deals with situations in which the firm’s regulated business is no longer viable or the firm makes a strategic/business choice to exit their regulated business(es). The firm’s assumption is that, for example, it will not be able to continue to carry on its activities or deliver the desired return on capital and so the focus is on how it can wind down its activities and relinquish its regulatory permission(s) in an orderly manner.

Q3: Which scenario is the most appropriate for the purpose of wind-down planning?

There are various scenarios which may lead to the wind-down of a firm (i.e. wind-down scenarios), such as loss of key client(s) or a severe economic downturn.

There is no single wind-down scenario that applies to all firms. The most useful scenarios to support forward planning are those that are severe, relevant to the firm and that may result in the regulated business not being viable.

Wind-down planning allows firms to plan ahead so that they have adequate financial and non-financial resources to:

1. (1)

   formulate judgement if they have become unviable;

2. (2)

   explore recovery options and/or mitigating actions (e.g. potential capital injections); and

3. (3)

   wind down the business in an orderly manner if no other option is available.

1This section explains the time horizon (including the likely starting point and end point of the wind-down period), and some of the associated activities and costs firms may want to take into account during the wind-down planning process.

The starting point of the wind-down period is when the firm’s governing body (e.g. the Board of Directors of a company) makes the formal decision to wind down its regulated business.

The end point of the wind-down period is when the FCA cancels the firm’sPart 4A permission.

1There are many reasons why a firm may wind down, including a strategic exit where the firm makes a business decision to exit one or more markets and the decision is not due to it being unviable.

However, our approach document focuses on dealing with scenarios in which a firm is no longer viable and is compelled to wind down its business. We refer to these as wind-down scenarios and these are typically used to inform a firm’s wind-down plan. A firm will probably identify more than one wind-down scenario.

To do this, firms may want to consider what events would be likely to make it no longer viable, which is often referred to as reverse stress-testing. A firm is not viable if it no longer has adequate financial or non-financial resources to carry on its regulated activities. This could happen for a variety of reasons, including:

1. (1)

   significant financial losses 2 with no signs of timely recovery;

2. (2)

   loss of key clients without realistic prospect of their replacement in good time; or

3. (3)

   loss of critical infrastructure (e.g. essential IT systems) with no signs of timely recovery.

A firm may consider the following factors when formulating its wind-down scenarios:

1. (1)

   business and operating models (business models show how a firm makes money, obtains funding and maintains healthy cash-flow while operating models look at the day-to-day operations of the business);

2. (2)

   key revenue drivers, clients and functions in its operating model; and

3. (3)

   vulnerable areas in its business and operating models.

Ideally, firms would consider various scenarios which may lead to winding down (including stressed scenarios) and associated potential recovery options. When a firm envisages that its regulated business is no longer viable (e.g. no recovery options remain available), it would start a wind-down process and our guide encourages firms to act swiftly and not wait until breaching threshold conditions to initiate a wind-down procedure.

1A good wind-down plan is most likely to be supported by an effective risk management framework. This may include:

1. (1)

   a clear risk appetite that has been approved and validated by the governing body;

2. (2)

   analysis of wind-down scenarios;

3. (3)

   appropriate reporting and monitoring of management information, risk metrics and early warning indicators; and

4. (4)

   any potential recovery options.

A clear risk appetite, as well as an effective risk identification and assessment approach, are important parts of wind-down planning. They can help to identify the risk metrics that need to be monitored and to set the appropriate thresholds.

Well-structured management information can help to identify emerging risks that could lead to a wind-down scenario. For instance:

1. (1)

   funding institutions are reconsidering terms/conditions of credit facilities provided to the firm;

2. (2)

   approaching the date of contract renewal with a key client; and

3. (3)

   profit and loss account pressure due to poor market conditions.

Good reporting processes can help ensure that the firm can assess emerging situations as soon as possible and intervene appropriately (i.e. in an attempt to recover).

A firm may consider setting thresholds for relevant management information (e.g. profitability, capital adequacy, liquidity), so that if the data shows breaches of those threshold values it can trigger a report to senior management and prompt thinking on the next steps.

Firms may consider potential options for recovery in the face of adverse business conditions, such as selling part of the business or seeking a capital injection. Even if a firm has taken these or similar steps aiming for recovery3, wind-down planning can still be relevant as there is no guarantee that recovery options would save the firm’s business.

3

2

1In 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’sgoverning body will need to make a formal decision to wind down in a timely manner. The wind-down plan can help the firm’sgoverning 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’sgoverning 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’ssenior 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).]

1It is important, given the FCA’sconsumer protection and market integrity objectives, that firms seek to identify and mitigate any adverse impacts on consumers, counterparties and the wider markets that might arise as a result of a wind-down decision. A thorough analysis of all stakeholders will largely help a firm identify who might be affected if it winds down. It also helps a firm to understand how difficult it will be to wind down, for example, if it has many non-cancellable contracts in place which will inevitably increase the costs of winding down and prolong the length of the wind-down period.

The obligation on firms to treat customers fairly continues to apply during the wind-down period. This includes, where relevant, considerations relating to client monies and custody assets (see WDPG 4.3 (Client monies and custody assets)) or the needs of potentially vulnerable customers.

Firms are required to keep up-to-date records. These will prove invaluable in assessing the number and types of consumers and counterparties that may be affected by the wind-down.

Firms can support their impact assessment of winding down by a risk assessment of each stakeholder group along with the mitigating actions the firm would consider appropriate. Some factors that a firm may consider include:

1. (1)

   How quickly can a firm conclude any outstanding transactions? Will there be any tax or other implications for customers?

2. (2)

   Can the firm help transfer its customers to another financial institution or, where relevant, firm with a permission to carry on regulated claims management activities2? If the firm has many customers to be transferred out, do other firms in the same sector have the capacity to take them on?

3. (3)

   How quickly can client monies and custody assets be returned?

An orderly wind-down minimises the impact on the wider market. Some participants in the market may be more affected than others, for example if the firm is a major provider of products for a particular sector, in which case its winding down may cause a greater impact than would otherwise be the case.

A firm may need to consider relevant employment legislation, especially if it has businesses that involve overseas jurisdictions. It may also choose to identify which employees need to be retained during the wind-down period to help with the wind-down operation, for example, compliance and contact centre employees.

Although it may seem less critical to include consideration of other third parties such as landlords, creditors or trade payables, firms will need a prudent approach to wind-down planning that factors in the effect of winding down on third parties that have contractual relationships with the firm, such as the landlord of the firm’s office. This ensures that essential needs, such as the need for premises, are still provided for during the wind-down period. It may also avoid a creditor, potentially facing the default of the firm on its obligations, triggering insolvency proceedings against the firm in anticipation of its exit.

1The wind-down period can be considered as a timeline along which steps are taken, from making the wind-down decision, all the way to the FCA cancelling the firm’spermission. A wind-down plan may be subject to last-minute changes arising from unforeseen external or internal circumstances.

These steps are effectively a function of, and in turn affect, a firm’s entire business. A firm may find it useful to assess the following non-exhaustive list.

1. (1)

   The industry and the sector it operates in and the impact it may cause to the markets when it winds down.

2. (2)

   Who its clients are and what processes are in place to maintain client records.

3. (3)

   Dealing with clientcomplaints and making adequate provisions for them, particularly post winding down.

4. (4)

   Legal and regulatory status (including FCApermission).

5. (5)

   Applicable legal, regulatory and insolvency requirements. These will include, among others, directors’ duties under company law, data protection requirements, employment law and FCA filing requirements.

6. (6)

   Organisational structure and operating model.

7. (7)

   Internal processes, systems and human resources.

8. (8)

   Processes or systems that are interconnected and/or outsourced.

9. (9)

   Existing contractual commitments, such as with employees or third parties. In particular, there may be restrictions or penalty clauses for breaking contractual relationships.

10. (10)

    Possible sale of all or part of the business and any applicable regulatory processes that may impact the timeline, such as a change in control application. It should also consider whether any arrangements need to be made for the migration of clients and how this will be communicated to these clients.

11. (11)

    Orderly vacation of premises and disposal of fixed assets.

After conducting its assessment a firm can work out an outline of sequenced actions in a wind-down scenario and how long each action will take. The specifics will vary from firm to firm but some possible considerations include the following.

1. (1)

   How would the firm announce the wind-down decision and manage communication with stakeholders?

2. (2)

   How will the firm reconcile clients’ business records and ensure their interests are not affected? For instance, a firm will have to return client monies and clientassets during wind-down.

3. (3)

   How would the firm deal with employee redundancies?

4. (4)

   Who needs to be available to assist the winding down?

5. (5)

   What systems (e.g. IT systems) need to be available for the wind-down?

6. (6)

   When might the firm need to engage professional advisors, such as an insolvency practitioner, to support the wind-down process?

The firm’sgoverning body will need to take ultimate ownership of, and accountability for, the timely implementation of the wind-down plan. However, for each step or activity this analysis identifies, it may be helpful to indicate who will be responsible for that particular task.

At the end of such an analysis, the firm will be better able to estimate the length of the wind-down period.

1To achieve the objective of winding-down in an orderly manner, a firm needs to have adequate financial and non-financial resources to do this and may ask itself a range of questions.

What non-financial resources, such as premises, IT, key employees, external advisors etc., does it need to carry out the steps identified in the operational analysis and for how long might it need them? (See WDPG 3.7 (Operational analysis: what happens during the wind-down process?)) Firms that are part of a larger group may need to consider issues of inter-connectedness, and in particular between regulated and unregulated parts of the group.

If a firm relies on outsourced services, will these services still be available during the wind-down period, or are contingency measures in place? When negotiating outsourcing agreements, firms may wish to consider the possible invocation of their wind-down plan and the impact this would have on the contractual relationship.

If a firm is part of a larger group, and is depending on group resources, would it still have adequate resources to wind down in an orderly manner if the group failed?

This guide does not provide any rule or interpretation in relation to the financial resources requirements applicable to a firm. Rather, it highlights some of the factors which a firm may want to consider in its wind-down planning.

It is important that firms monitor their solvency on a regular basis to ensure they continue to be able to meet their obligations as they fall due. If a firm becomes uncertain of its ability to do so, it may seek professional advice, such as from an auditor or insolvency practitioner to assist.

A firm in wind-down will likely have non-routine cash inflows and outflows, which are best monitored on a daily basis. These will include:

1. (1)

   inflows, i.e. predicted revenue and other inflows that are likely to be limited after the triggering event and/or if a wind-down decision is made;

2. (2)

   ordinary outflows, i.e. the cost of maintaining operational premises and systems; and

3. (3)

   extraordinary outflows associated with winding down, such as extra closure costs, legal fees, professional services and insolvency practitioner fees, redundancy payments, retention payments, pension fund deficits, lease and other termination penalties and the costs of breaking contracts.

A firm might then consider if it would have enough cash or cash-equivalent investments to meet operating expenses and any other obligations during the wind-down period.

1A firm needs to have its Part 4A permission cancelled to complete the wind-down process. Before the FCA can grant a cancellation, we will review, among other things:

1. (1)

   generally, whether it would be detrimental to customers or would cause market disruptions to cancel the permission;

2. (2)

   whether there remain any long-term “tail” commitments for which arrangements acceptable to the FCA have not yet been made;

3. (3)

   whether there are any existing unresolved customercomplaints or any that might reasonably be expected in the future;

4. (4)

   whether all client monies and client assets (if any) have been returned in accordance with CASSrules; and

5. (5)

   whether there are any outstanding fees owed to the FCA.

[Note: Although we aim to complete a cancellation transaction as quickly as possible, we will need sufficient time to consider whether a firm meets the regulatory requirements or prerequisites for cancellation of permission.]