Improvements needed to brokers’ wind-down planning
The Financial Conduct Authority (FCA) has published its conclusions following multi-firm work on insurance brokers’ wind-down planning activity. In particular, the FCA considered the adequacy of firms’ assessment of the amount of cash (aka ‘liquidity’) they would need to be able to run down their business in an orderly fashion.
The FCA highlighted that where firms failed to have robust wind-down plans in place, they would not be able to demonstrate that they held appropriate financial resources (as required under the Threshold Conditions for becoming and remaining an authorised firm) to ensure an orderly wind-down.
Where the FCA did see good practices, these included:
clear identification and regular reviews of the risks inherent in the broker’s business model
strong consideration of the harms which could flow from those risks, and the steps needed to mitigate them
detailed and well thought-out cashflow projections and assumptions for wind-down
stress testing and reverse stress testing, embedded in the risk management framework, which improved modelling and wind-down planning by providing a broader view of the likelihood of risks crystallising
strong risk management frameworks which included risk metrics and forward-looking management information. This empowered firms to be able to adequately identify and manage the risks they are exposed to
Members may wish to consider the above for comparative purposes, when reviewing their own wind-down plans.
As with all things related to the operations of a firm, the need for good governance also featured, with the FCA observing that ‘evidence that these risks were considered at the right levels of the management hierarchy’ within a firm was an important element towards ensuring the effectiveness of the firm’s wind-down planning process.
The FCA also highlighted that regular reviews of a firm’s wind-down plans and the modelling of the minimum liquidity required, was a must.
When using stress test scenarios for the purposes of wind-down planning, these needed to be sufficiently severe (so that they are likely to trigger wind-down), otherwise they will not be useful in explaining what may happen during wind-down.
Firms were asked to consider risks arising from the potential impact of group exposures such as operational dependencies, debt guarantees or group level pension liabilities. Where a firm is part of a group (with or without intergroup dependencies) the FCA requires the liquidity needed to achieve orderly wind-down, to be sitting with the firm and not with the immediate parent company or another group company.
Members wishing to read the FCA’s findings may find the report here.
BIBA members’ compliance and regulation queries should be directed to: compliance@biba.org.uk quoting their membership number.
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