Bringing solvent exit planning into BAU

The PRA's June 2023 Consultation Paper (CP10/23) and accompanying draft Supervisory Statement set out proposals and expectations for non-systemic UK banks and buildings societies to prepare for, and be able to execute, an orderly 'solvent exit' from PRA-regulated activities. 

Against the backdrop of recent bank failures, it's unsurprising that there is significant regulatory focus on ensuring the controlled exits of failing firms and maintaining market confidence. The PRA committed in its 2022/23 business plan to doing more to increase confidence that firms could exit the market with minimal disruption without having to rely on the backstop of an insolvency or resolution process. It has now proposed requirements for smaller banks and building societies to prepare solvent exit analysis and detailed solvent exit execution plans as part of business as usual (BAU) activities, `regardless of how unlikely or distant a prospect solvent exit may seem’¹. The requirements would take effect from Q3 2025.

The PRA believes that embedding solvent exit analysis and planning in BAU activities will:

• Help mitigate the risk of firms being unprepared for a solvent exit or unaware of the costs and time involved ― thereby increasing the likelihood of a successful, more efficient and less costly exit;
• Reduce the risk of contagion and disruption to the wider markets;
• Reduce the likelihood of costs of exit being passed on to industry through the Financial Services Compensation Scheme (FSCS); and 
• Support a more dynamic, competitive market. 

The PRA's solvent exit proposals are a vital corollary of its competition objective ― barriers to entry can only be reduced for non-systemic banks and building societies barriers to exit are also reduced.

The proposals in CP10/23 would formalise solvent exit policy within the PRA policy framework, to sit alongside recovery and resolution as a possible route for non-systemic firms facing stress ― as shown in figure 1 of the consultation. 

1. The PRA's key proposals are that:

• Firms should prepare for a solvent exit as part of their BAU activities:
• Preparations to be documented in a solvent exit analysis which may form part of the existing recovery plan.
• The solvent exit analysis must be provided to the PRA upon request.
• At a minimum, it should include solvent exit actions, solvent exit indicators, potential barriers and risks, resources and costs, communication, governance and decision making and assurance.
• The level of detail in the analysis should be proportionate to the nature, scale, and complexity of the firm.
• The analysis should take account of plausible circumstances that could lead to solvent exit. Firms may draw upon and adapt scenarios developed under the PRA's recovery planning expectations.

2. Once solvent exit has become a reasonable prospect, firms should prepare a detailed solvent exit execution plan and monitor and manage a solvent exit: 

• The solvent exit analysis, prepared during BAU, should be used as the starting point for a firm's solvent exit execution plan.
• The execution plan should be prepared within a reasonable amount of time and include:
  • Actions and timelines (from the point of initiation to the removal of the firm's Part 4A PRA permission).
  • Identification and mitigation of barriers and risks.
  • A communication plan for stakeholders.
  • A detailed action plan for execution.
  • An assessment of financial and non-financial resources needed to complete the execution and how the firm will monitor and maintain access to these resources.
  • Governance arrangements.
  • Organisation structure, operating model and internal processes.
• A firm's board of directors, or other appropriate governance committees should provide sufficient challenge on the execution plan, and review and approve it.
• Firms should support any underpinning assumptions with appropriate evidence.

Paragraphs 2.7 to 2.9 of the Appendices to the consultation set out solvent exit indicators which may inform a firm's decision to move to the execution plan stage alongside `other relevant information'. However, this and the `reasonable amount of time' requirement introduce potential for ambiguity into the process. While it appears that the PRA is trying to help firms by spreading out the requirements, smaller firms might find it more straightforward to have a simple, but more prescriptive, playbook to follow. 

CP10/23 would make consequential changes to SS3/21 ('Non-systemic UK banks: the PRA's approach to new and growing banks'), amending the `Solvent wind down' section. The new proposals would also formally replace the phrase 'solvent wind-down' with 'solvent exit'. In-scope firms would be subject to a proposed new Chapter 7 of the Recovery Plans Part of the PRA Rulebook.

The consultation closes on 27 October 2023, with final policy likely to be implemented from Q3 2025, not far behind the March 2025 Solvent Wind Down deadline for larger banks (for more on these requirements see our article here). 

Where appropriate, firms may use their work under existing recovery planning policy to meet, or begin to meet, the proposed rules and expectations.

The solvent exit analysis process should drive out the main barriers and risks to be overcome by firms, creating feedback loops that enable them to make effective decisions for both the solvent exit requirements and their recovery planning exercises. 

In preparation for Q3 2025, firms will need to consider four key elements:

• Capital and funding — including planning and forecasting; 
• Continuity of operations — including people analysis and implications on areas such as HR, legal and redundancy arrangements;
• Customer outcomes and conduct — although CP10/23 focuses on prudential requirements, firms must also consider consequential conduct risk impacts and balance their own commercial interests with those of their customers. This could include identifying solutions that provide appropriate outcomes for fixed term deposit holders and agreeing what, when and how to communicate with customers to enable them to make informed decisions; and
• Communications — communication strategy can have a critical impact on stakeholder and market confidence, and is especially important in the digital age where information travels very rapidly and across multiple channels.

We encourage relevant firms to engage actively with this consultation and take the opportunity to consider how they would go about meeting the proposed requirements. 

KPMG in the UK has a multi-disciplinary team that can advise you, not just on the regulatory aspects of CP10/26, but also on its commercial, strategic and legal implications. Our risk and regulatory professionals can help you identify business benefits rather than treating solvent exit as a tick box regulatory exercise. This, in turn, can help drive process, governance and/or strategic efficiencies. 

KPMG in the UK has helped many banks formulate and execute their solvent exit plans. Our risk and regulatory professionals have extensive experience including:  

• Advising banks on trading book wind-down work; 
• Performing skilled person reviews of solvent exit processes;
• Supporting clients in the preparation and review of solvent wind-down and solvent exit; plans, including as part of the authorisation process; and 
• Broader recovery and resolution planning. 

Lessons from all this work can now be applied to CP10/26.