Earlier this year, the Financial Conduct Authority (FCA) published the results of a multi-firm review focusing on risk management and wind-down planning. The review involved 14 firms with varying business models.
E-money and payment firms are innovative and constantly evolving. Focusing on risk management and wind-down planning strengthens financial resilience, both for the individual businesses and the wider sector.
We know from our engagement with e-money and payment firms that these are not new topics, but benchmarking can always help. The FCA acknowledges that firms have made a start at meeting their expectations, but there is an overall concern that frameworks are generally inadequate for the complexity of activities and generally not mature enough to support decision-making. The review identified specific challenge areas for management.
- Ensuring that risk management frameworks are consistent with the business and can support decision-making. More specifically, the FCA highlighted the limited amount of risk oversight and risk appetite, which did not reflect the business.
- Limited consideration of liquidity risk, including controls and monitoring to ascertain what cash balances would be needed if risks materialise.
- Limited consideration of group risk, e.g., excessive reliance on group risk management, such as risk appetite, without considering the suitability for the e-money and payment firm.
The FCA’s main finding on wind-down plans was that they lacked sufficient detail and had not been adequately tested or validated. The plans were disconnected from the firm’s risk management framework and required significant improvement to be credible. The FCA identified specific challenges for management.
- Limited liquidity modelling through wind-down.
- No testing of stresses that take place after the wind-down has started.
- Undue reliance on group wind-down plans or resources.
The FCA conducted a cross-sector review of wind-down planning in 2020, and identified similar challenges for management. In particular, it emphasised the need for credible wind-down plans and highlighted issues such as inadequate consideration of liquidity, intra-group dependencies and wind-down triggers.
This raises concerns, as it suggests that e-money and payment firms are failing to apply lessons from previous FCA reviews that are directly relevant to their operations. It is also important to highlight that when considering enforcement actions, the FCA takes into account whether it has issued guidance to remind organisations of their expectations in the specific area. The FCA has provided further details of their findings in these two reviews. The FCA expects risk managers, CROs and chairs of risk committees to review their arrangements against these findings and take action to enhance risk management frameworks and wind-down planning.How Crowe can help you move forward
At Crowe, we help you assess the maturity of your wind-down process and risk management frameworks so you can understand how well your business meets regulatory expectations. From there, we work with you to develop a clear and practical roadmapfor improvement.
In our experience, the real business challenge often lies in the road map itself. Not just addressing gaps, but addressing them in a way that is both pragmatic and aligned with your business model. That’s where we come in.We have supported a wide range of organisations in implementing effective, proportionate risk frameworks and wind-down planning solutions. Our approach is grounded in what works, not just what is expected.
If you’re seeking a trusted advisor to support the implementation of meaningful change, we’d be happy to explore how we can support you.
