On 21 January, the Financial Conduct Authority (FCA) delivered a Payments & E-Money: safeguarding & wind-down webinar to compliance consultants which included some significant points that will be of relevance to firms.
Referencing an initial FCA review of 14 firms’ wind-down plans, FourthLine has summarised a number of these below:
- Some firms yet to start work on their wind-down plan – The FCA considered it unacceptable that some firms have taken that long and still not responded to the Guidance
- Consultation is coming - Full changes in the FCA’s approach and expectations for both safeguarding and wind-down planning in payments and e-money firms will be delivered in an upcoming Consultation Paper (CP) on their rules and supervision approach. Focus points expected in the CP will include robust safeguarding and prudential resilience (wind-down planning)
- Use of pre-provided templates for population were worrying – Some consultants have been providing cheaper alternatives via prepopulated ‘fill in the blanks’ style templates. Whilst cost-effective, the result was described as a “sorry sight”. Problems with shortcutting saw the company name added into blanks of a company with a different business model, rendering parts of it ineffective and not fit for purpose
- Wind-down plans should address liquidity, operational and resolution risks, proportionate to size and nature of the firm – The better examples were clear on these risks and dovetailed in with appropriate and consistently monitored trigger points for invocation of both solvent and insolvent wind-downs. Risks to be considered that were often overlooked included operational risks including third party, cyber and internal staffing
- Plans should include realistic triggers to start a solvent wind-down – Typically these would be linked to points around capital, liquidity, and / or profitability. Points should be regularly reviewed and monitored, and the Plan should include examples of MI specifying this. Of the 14 plans, only 1 provided triggers for both solvent and insolvent wind-down
- Firms should identify third party dependencies and which of these are critical – Of the 14 plans reviewed, 6 of 14 did not mention these. 8 firms gave some information but lacked “next step” thinking – e.g., they identified suppliers but did not specify which ones were key service providers for insolvency
- Plans should address funding needs to cover solvent wind-down of the business – The most effective plans fully considered funding and costs for solvent wind-down, including the cost of returning customer funds.
Financial projections over the period of plan are good but can become outdated and inaccurate resulting in negative outcomes driven by unrealistic projections.
Not considering costs could lead to a disorderly wind-down. Some firms ringfenced the cost of returning funds to customers. Other plans saw an omission of costs, such as contract penalties, IT, insolvency practitioner and staffing costs. Some were also imprecise around the timings of costs incurred.
Of the 14 plans reviewed, 5 considered necessary funding whilst 12 considered scenarios around wind-downs
- COVID-19 schemes and measures – The FCA confirmed it was up to firms, but COVID-19 support measures can be considered. If triggered, firms would need to ensure the availability of these schemes at the proposed time of wind-down
- IT and Cyber are critical - Strong IT and cyber controls will be required throughout the life of a wind-down, with both staff and systems controls needed. 8 firms had not provided information on IT resilience when wind-down started
For any questions on the above or to set up a no-obligations call with our Risk Consulting Director, Ross Molyneux, please click on the link below:
To read our previous paper on Prudential requirements, please click here>