WARNING : You have a huge hole in your wind-down plan.

You have a responsibility to ensure your firm conducts an orderly wind-down when the time comes. However your planning currently has significant gaps in it that you may not have even spotted. This post describes two key areas related to Client Money that we strongly recommend you start thinking about now in order to prevent excessive time and money being wasted down the line, and risking the safety of your clients' funds.

DISCLAIMER : Our blog posts usually give you the benefit of our expertise in the hope that you attempt to improve your customer outcomes even if you are not using our services. Unfortunately for the two problems we identify below, we are not aware of any reasonable steps your firm can take without partnering with us. If you feel the same after reading the below, then please contact us to get the discussion started.

The Regulatory Context

The FCA stress that an effective wind-down plan aims "to cease its regulated activities and achieve cancellation of its permissions with minimal adverse impact on its client, counterparties, or the wider markets." They are aware of the apathy that most companies have for wind-down planning, the "it'll never happen to us" approach that leads to a wind-down plan failing to receive the appropriate due diligence it requires.

The frequency of references to wind-down planning has increased dramatically over the last few years with a Dear CEO letter from March 2023 titled "FCA Priorities for Payments Firms" emphasising the need to have appropriate wind-down plans with regular review. Another Dear CEO letter from August 2023 titled "Our supervisory strategy for Principal Trading Firms" sets out their expectation for robust plans to be in place to meet capital and liquidity during orderly wind-down, and to plan on the basis that their own wind-downs are likely to be made more complex by surrounding stressed environments.

It is also now common for the FCA to request a copy of your firm's wind-down plan at the start of an assessment process that may lead to a section 166 or other punitive or remediation measures. It's a red flag to the FCA if a comprehensive copy isn't immediately available.

Your Wind-Down Problem

Q. What are you going to do with Client Money from unresponsive clients?

As you may know, clients that have been inactive for 6 years or over, with funds still in their account, can have those funds paid away to charity upon completion of the comprehensive communications schedule stipulated by CASS. But you will have clients that have money in their accounts, been inactive for less than 6 years, and remain unresponsive. You may have been doing your best to retain an active relationship with them in that time (and if you haven't then we can help you do that - check out our services), but when it comes to the crunch they just aren't giving you the instruction you need to either return the funds to them or pay it to charity.

We have seen this scenario play out with a number of industry players and it always has bad outcomes for everyone :

1. For the firm; firms will often have their wind-down extended for months and sometimes years in order to allow enough time to elapse for the FCA to be comfortable that the client money has been appropriately treated. The additional staffing, operational and advisory costs firms will incur are huge, and liquidity and capital requirements remain in place throughout, putting a strain on shareholders who may wish to access funds and reduce their own exposure ASAP. The firm is in limbo, we term it a zombie state as it is unable to provide its regulated services but unable to close its cost base.

2. For the regulator; it is likely that at some point the FCA will be asked for a modification or waiver to its CASS rules in order to allow client money to be paid to a charity. Not only does this take up bandwidth of the regulator, waivers and modifications also set unhealthy precedents that lower the bar on the standards firms are expected to adhere to. But right now there is no other option. It is recognition of the fact that if a firm is going to the wall, there will come a point that it cannot keep the doors open just to manage the client money.

3. For the client; the outcome of the FCA's waiver and modification approval is likely to be the payment of a client's money to charity sooner than the 6 year protection threshold. Of greater consequence however is that there will likely be no organisation that they can reclaim the funds from at a later date. This means that the client money has effectively been written off with the client having no means of recourse.

Cleardown Solutions resolves this by allowing transfers in of residual client money to it. This removes all liability on the liquidating firm, and continues the protection of the client money, allowing a client to have their funds returns upon request.

If upon reflection, your wind-down plan has this gaping hole in it, then we suggest you get in touch with us. With a low annual subscription, you will be given guaranteed approval to use all of our services throughout the year, clear timeframes on delivery, and discounted costs. Non-subscribers do not get these benefits. We can not guarantee we will be able to serve them, and they services will be significantly more expensive.

Partnering with Cleardown Solutions will allow accurate budget forecasts in your wind-down plan, and convey greater assurance to your clients that their money is safe in your hands.

If you want to discuss an aspect of this blog post, our services, or any other related queries, then please contact us and we will be happy to help.