WDPG 3.1 What is wind-down planning?

1Wind-down planning is a process in which the firm’s governing 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’s governing 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.]

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.