Wind-down planning: FCA expectations for smaller regulated firms
Wind-down planning — the process of designing and documenting how a firm would cease its regulated activities in an orderly manner without causing harm to consumers, markets, or the firm's creditors — is a regulatory obligation that has historically received less attention than it deserves from smaller firms. The FCA's expectation, made explicit in the MIFIDPRU regime and increasingly applied to other firm types through SYSC and supervisory guidance, is that every regulated firm should be able to demonstrate that it has thought through how it would cease trading in an orderly way and has set aside adequate resources — in capital, liquid assets, and time — to execute that plan.
Under MIFIDPRU 7, all in-scope investment firms must maintain a documented wind-down plan and must hold wind-down capital — defined as own funds sufficient to cover the costs of an orderly wind-down over a defined period. The wind-down plan must describe the trigger conditions that would initiate a wind-down, the key actions required to achieve an orderly cessation, the estimated costs of the wind-down (including regulatory fees, outstanding contractual commitments, and the cost of returning client assets), the timeline for completing the wind-down, and the sources of capital and liquidity that would fund it. The wind-down capital buffer is set through the ICARA process and must be calibrated to the actual estimated costs, not merely set at a standard percentage.
For firms with client assets or client money, the wind-down plan must specifically address how CASS assets will be returned to clients in an orderly manner. This requires the CASS resolution pack to be current and complete, requires the firm to have identified the steps involved in a CASS return process, and requires an estimate of the time and cost involved. Where the firm uses third-party custodians or sub-custodians, the wind-down plan must address how custody relationships would be managed or transferred during wind-down. The FCA has found that many CASS resolution packs are inadequate to support an actual wind-down — being either out of date or insufficiently detailed to guide an insolvency practitioner through the return process.
The FCA's supervisory approach to wind-down planning has evolved from passive review to active assessment. In recent Dear CEO letters and thematic feedback, the FCA has indicated that it expects firms to test their wind-down plans periodically — through scenario analysis if not full simulation — and to update them following material changes in the business. A wind-down plan prepared at authorisation and not reviewed since is unlikely to reflect current business reality, and will not withstand supervisory scrutiny. Firms should incorporate wind-down plan review into their annual ICARA or equivalent governance cycle.
Practical triggers and pre-winding down considerations
A well-designed wind-down plan should include pre-defined triggers — financial, regulatory, or operational thresholds at which the wind-down decision should be escalated to the board. This prevents delay in difficult situations where there may be management reluctance to acknowledge that wind-down is necessary. Common triggers include: a capital ratio falling below a defined multiple of the regulatory minimum; loss of a key client or contract representing more than a defined proportion of revenue; loss of key personnel without which the regulated activity cannot be performed; or regulatory action that restricts the firm's ability to conduct its business.