WDPG 3.3 Wind-down scenarios: what would make a firm no longer viable?

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.