The importance of wind down planning for non-regulated lenders

In recent years, there has been an increased focus on the necessity of wind down planning among financial services businesses who provide non-regulated lending. Whilst regulated firms have to adhere to the Financial Conduct Authority’s (FCA) guidance, non-regulated lenders have less regulatory burden. However, this is beginning to change. Major credit funds, institutional investors, and regulated entities are now insisting on robust wind down plans for non-regulated lenders as they are crucial to minimise the risk of a disorderly failure, which could negatively impact investors, clients, counterparties, and the wider market in the event of a business failure.

FCA guidance on wind down plans

The FCA has provided clear guidance on what a wind down plan should entail. Specifically, the plan should:

• Identify the steps and resources required to wind down the loan book.
• Evaluate the risks and impacts of the wind down and outline strategies to mitigate these risks.

Key components of a good wind down plan

A well-constructed wind down plan should include the following key components:

• Scenarios and triggers leading to wind down: Clearly define the scenarios and triggers that would necessitate a wind down.
• Orderly wind down plan: Outline how the business will be wound down in an orderly manner.
• Resource assessment:
  • Financial: Prepare a wind down cash flow forecast to demonstrate that the firm has adequate cash to meet operating expenses during the wind down period.
  • Non-financial: Assess the necessary premises, people, IT systems, and software.
• Risk mitigation processes: Identify and mitigate risks to ensure an orderly wind down, preventing consumer harm and adverse impacts on financial markets or third parties.

Areas to consider when producing a wind down plan

A wind down plan should be realistic, robust, and regularly updated to reflect changes in the business and loan portfolio. RSM recommends considering the following areas:

• Business and operational overview: Provide context for the product(s), including term and pricing, group structure, operating model, and management and staff structure.
• Risk management framework: Highlight relevant risks, outline key policies and processes for monitoring harms, and define wind down triggers.
• Governance: Document ownership and update policy, and establish a mechanism to invoke the plan, including notification of key stakeholders and execution of the wind down plan.
• Wind down scenarios and impact assessment: Outline all scenarios that could lead to the invocation of the plan, assess the potential impact on all stakeholders, and consider the impact on other group entities.
• Wind down process and communication plan: Provide a step-by-step guide with timelines for each step, consider business or asset sales, and develop a detailed communication strategy for all stakeholders.
• Resource assessment:
  • Financial: Prepare a detailed wind down cash flow forecast with a thorough analysis of assumptions.
  • Non-financial: Assess the required people, IT systems, data, property, and suppliers.

Who should consider wind down plans?

• Directors: Need to consider their statutory duties and duties under the FCA senior managers regime.
• Wholesale funders: To minimise and mitigate risk and ensure appropriate exit planning if required.
• Equity investors: Aim to develop appropriate downside protection.

How RSM can help

RSM can assist by reviewing and advising on existing wind down plans, focusing on:

• Scenario assumptions.
• Communication plans.
• Practicalities of both solvent and insolvent wind-down scenarios.
• Stress testing assumptions underpinning the wind down cash flow forecast.

In conclusion, robust wind down planning is essential for any financial services business involved in regulated and non-regulated lending to ensure, firms can develop effective plans that mitigate risks and minimise negative impacts; not just for their business, but for the whole industry.

For further information on wind down planning for non-regulated lenders, please contact on of our experts below.