The PRA has published Consultation Paper CP10/23 setting out its proposals for UK non-systemic banks and building societies to plan for "an orderly 'solvent exit'" as part of their business-as-usual Recovery Planning activities.
A "solvent exit" means that where a firm exits the market and ceases PRA-regulated activity, it is able to do so whilst remaining solvent and able to transfer or repay all deposits to its customers.
In its 2021 business plan, the PRA identified risks around firms exiting the market and stated an intention to do more to "increase confidence that firms can exit the market with minimal disruption, in an orderly way, and without having to rely on the backstop of an insolvency or resolution process". Consultation Paper CP10/23 is part of the PRA's programme of work to achieve this objective.
If the proposals in the consultation are implemented, they will add a new chapter to the PRA Rulebook and a new supervisory statement will be introduced in respect of firms within the scope of the proposed rule. The proposals are intended to improve the prospects of firms successfully carrying out a solvent exit by encouraging firms to anticipate, and plan for, potential issues and barriers (rather than issues coming to light once an exit is already in train), and thereby reducing potential market disruption and harm to customers that may arise from a more protracted and uncertain process.
The PRA also considers that these changes have the potential to reduce the industry costs of funding the Financial Services Compensation Scheme as clearly if firms are able to exit the market in a solvent way, repaying deposits to their customers, those customers will not have to seek recourse from the FSCS.
The proposals include:
- A requirement for firms to prepare for a solvent exit as part of their business-as-usual activities and to document this plan in a solvent exit analysis
- Where a solvent exit became a reasonable prospect for a firm, there would be an expectation for that firm to prepare a detailed solvent exit execution plan and to monitor and manage that solvent exit
- Amendments to the Solvent Wind Down section in Supervisory Statement SS3/21.
The PRA proposes that the new rules regarding solvent exit planning will apply to all firms in scope no matter how unlikely a prospect a solvent exit is. The proposals focus on all firms planning the mechanics for them to execute a solvent exit whether that scenario is likely or not.
The consultation recognises that some firms may use their existing recovery planning processes to cover the expectations set out in the proposed rules. In considering plans for a solvent exit, firms should think about the main barriers and risks they would face in undertaking a solvent exit and ensure that their decision-making processes allow for timely and efficient action, should it be necessary.
There are costs associated with the PRA's proposals as firms would be required to create and maintain their solvent exit plans. However, the PRA considers that firms should be able to leverage existing recovery planning work and the expectations are proportionate to the nature and scale of the firm's activities.
What this means for you
The PRA's consultation closes on 27 October 2023, with the PRA indicating that the implementation date for the proposals would be Q3 2025.
Whilst the potential implementation date for the proposals is a couple of years away, in-scope firms may wish to consider the expectations set out in the proposals as part of their recovery planning work as well as their governance and decision-making processes in the event an exit plan needed to be implemented.
Many firms will have little experience of a solvent exit and therefore may need to seek support and appropriate advice on common issue that may arise, in order to put together an appropriate solvent exit analysis plan in line with the PRA's proposals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.