This article was based on this International Banker Publication, by Tony Kyriacou and Michael Laney, Principal Consultants at Davies.
Policy Statement PS5/24 might not appear eye-catching. But this statement, published by the Bank of England (BoE) on 12 March 2024, put the spotlight on solvent exit planning for non-systemic banks and building societies, outlining how these types of firms in the UK should prepare, as part of their business-as-usual (BAU) activities, for an orderly ‘solvent exit’.
The changes had been in the offing for some time. In 2021, Sam Woods, CEO of the BoE’s Prudential Regulation Authority (PRA), stated that ease of exit from the market was one of the regulator’s key focuses for its future work. In its business plan for 2022/23, the PRA again emphasised that it would act 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.
The rationale for the changes is clear enough. The failure of any financial institution has the potential to destabilise economies – globally and domestically – as well as inflicting damage on consumer, business and investor confidence. When big banks fail, financial crises can follow, and while governments are often quick to intervene when systemic firms are deemed at risk of collapsing, the effects of smaller – or non-systemic – banks and building societies failing ought not to be underestimated.
Solvent exits are important for limiting potential shockwaves when a bank or building society ceases operations. In making its changes, the PRA aims to ensure non-systemic firms are undertaking similarly diligent planning for solvent exits as their larger counterparts.
Specifically, the PRA has released Policy Statement PS5/24 to clarify expectations for firms going through the solvent exit process, improving communication throughout the process and offering a better chance of a smooth, successful exit. This statement warrants careful review – it is essential that banks and building societies are completely clear on what is now required of them, and that they act accordingly.
What do the changes mean for non-systemic banks and building societies?
The new rules come into effect from 1 October 2025. Broadly speaking, the regulatory changes apply to UK banks and building societies with less than £10 billion of total assets and sight deposits of less than £350 million. These non-systemic banks and building societies must be better prepared for a solvent exit, taking specific action to be compliant with the new PRA rules and expectations.
In practice, this means that these firms must carry out a Solvent Exit Analysis (SEA). The overall objective is to be able to cease deposit-taking activities while remaining solvent, in turn allowing the firm to repay deposits before closing down operations entirely.
Banks and building societies must maintain a SEA document, thereby demonstrating they are suitably prepared for a solvent exit. This document should be updated whenever a material change takes place and at least every three years.
Accounting for a wide range of ‘plausible circumstances’ (stressed and non-stressed) that could lead the institute to instigate a solvent exit, the SEA document should outline how the firm would carry out a solvent run-off of its liabilities. Other alternatives could be plotted out, such as a sale or partial sale, the transfer of all or part of its business under Part VII of the FSMA 2000, or a solvent scheme of arrangement or restructuring plan.
The firm should identify and monitor both financial & non-financial indicators that a solvent exit might be required – warning lights, if you will, based around quantitative metrics that will underscore the viability of a bank or building society’s BAU activities. It is important that these indicators are forward looking, and that measures are taken to ensure alerts are triggered as early as possible. After all, the more time a firm can afford itself, the greater the likelihood that the can achieve a successful solvent exit.
Crucially, as part of its SEA, a firm should set out the financial resources and costs – including capital, funding, and liquidity – needed to execute a solvent exit. These resources need to account for the discounted rate at which assets might need to be sold off, redundancy payments, and so forth. In addition, non-financial resources should also be defined, such as key staff, IT infrastructure, premises, licences and so on.
Communication is another important pillar in the strategy; which internal and external stakeholders will need to be informed throughout different periods during the execution of a solvent exit?
Additionally, there are important governance requirements involved. For instance, firms will need to name an executive accountable for the firm’s preparations for a solvent exit, and at any point the bank or building society should, upon request, be able to provide the PRA with the current version of its SEA.
Finally, the SEA should clearly outline all the potential barriers & risks to achieving a successful solvent exit. There are many considerations to address, and these will vary depending on the firms’ operations and size.
While the SEA is maintained on an ongoing basis as part of its BAU activities, the PRA expects that firms will produce a Solvent Exit Execution Plan (SEEP) within a month of there being a “reasonable prospect” that a firm will need to pursue a solvent exit. Firms must also be prepared to produce a SEEP upon request from the PRA at any time.
A challenging, far-reaching process
The above touches on only some of the essential, top-line elements that are involved in planning for a solvent exit. Clearly, for non-systemic banks and building societies that have hitherto not undertaken in-depth SEA, responding to the new requirements laid out by the PRA could prove challenging.
The complexity of the task will be dictated, in part at least, by the size and complexity of the firm. Complicated legal and corporate structures, the liquidity of the assets owned, the existence of untraceable or uncontactable customers, and regulations governing different markets and territories that the company operates in – there are many factors that can make SEA more challenging.
Importantly, a bank or building society is required to include a level of detail within its SEA (and, if required, SEEP) documentation that is “proportionate” to the nature, scale, and complexity of the firm.
To that end, SEA, and the development of a SEEP, ought to involve several clear and distinct phases: scoping and mobilisation; planning and documentation; testing and quality assurance; and execution and dress rehearsal. Assumptions contained within any part of the documentation – from the financial resources required through to the timeline at which parts of the plan will be executed – must be supported with appropriate data and analysis.
The benefits of acting promptly
There are 17 months until the new rules come into effect. Challenging though compliance might seem to some firms at this point, there are significant advantages of preparing thoroughly and promptly – these extend far beyond simply remaining on the right side of the PRA’s requirements.
- There is an increased likelihood of a successful solvent exit. By preparing for a solvent exit as part of BAU, firms reduce the risk of time delays and financial losses should they need to pursue this option – stakeholders and creditors will benefit.
- A smooth, solvent exit will minimise disruption to the UK economy. From a reputational perspective, this is important – poorly executed and communicated exits risk tarnishing the legacy of the brand involved, as well as the leadership teams behind it.
- Unsuccessful solvent exits can result in deposits not being paid in full, which leads to extra costs being incurred and passed to other firms if the Financial Services Compensation Scheme (FSCS) is required to complete the payouts.
- As is the PRA’s ambition, more diligent and thorough solvent exit planning ought to provide greater confidence among firms that they – and others – can exit the market more easily if the need arises. This breeds confidence among investors, offering them greater assurance that they will be able to access their funds should the firm they have invested in become unsustainable or non-viable. This all contributes to a well-functioning and competitive market.
Now is the time to act
Solvent exit planning will undoubtedly remain high on the agenda for the UK’s non-systemic banks and building societies over the coming years. Adapting to evolving regulation is a constant challenge for any financial services business, and despite the recent changes having been anticipated for some time, it is crucial that banks and building societies have access to the support they require to keep abreast of the reforms.
In addition, the challenges the incoming PRA rules present should also be seen as an opportunity to conduct a thorough assessment of a firms operating model, balance sheet and customer experience. In turn, this will provide the foundations to better align commercial strategies, stakeholder engagement protocols, and internal governance frameworks. Although potentially complex, the reforms will mark a positive step forward for the banking industry.
The clock is ticking, and firms will know that 1 October 2025 will roll around quickly. As such, there is no time to waste in ensuring preparation for solvent exit planning begins in earnest, if it is not already underway.
How can Davies help?
For many non-systemic banks and building societies, navigating the complexities of solvent exit planning may seem like a daunting task. As the clock ticks towards the implementation of the PRA’s adapted regulations, however, the importance of thoroughly overcoming these complexities has never been greater.
Fortunately, Consulting at Davies’ legal entity (LE) change team can provide all the tools needed to navigate these intricacies from across our multidisciplinary practices and geographies. We have unrivalled experience in this area of expertise, having worked across a wide range of legal entity change initiatives in the main global financial hubs, namely EMEA, APAC and the Americas.
In addition, we have a clear approach to the process that’s built on a foundation of deep, sector-specific expertise. Our team works exclusively in this space and brings practitioner-level understanding of the market structure and regulatory environment.
As a result, we understand the wide variety of challenges that organisations will face in the months and years ahead and stand ready to assist them through every phase of the solvent exit planning process.
Our proposed approach
Consulting at Davies employs a systematic, tried and tested approach to preparing for the PRA’s new regulations; the process is split into four phases, i) Scoping & Mobilisation, ii) Planning & Documentation, iii) Testing & Quality Assurance phase and iv) Dress Rehearsal & Implementation.
Scoping & Mobilisation
In this first phase, Consulting at Davies would conduct a comprehensive review of the organisation’s capabilities, landscape and impacted function by carrying out an ‘entity diagnostic review’. This in turn enables us to map out the relevant solvent exit indicators and associated inputs & outputs, to ensure full compliance with the PRA’s new regulations.
Once the diagnostics review is complete, we are then able to define an end-to-end ‘delivery framework’, outlining impacted functions, required workshops and appropriate governance. The framework provides the blueprint to effectively mobilise the organisation through a series of structured and target workstreams that will facilitate staff buy-in to the organisation’s regulatory objectives and align the firm’s resources with the delivery of the new PRA rule.
Once completed, Consulting at Davies is better placed to identify gaps in staff knowledge and awareness about the shifting regulations, allowing us to craft and roll out targeted training across the firm in a later phase.
Planning & Documentation
Building on the outputs from the previous phase, Consulting at Davies would leverage the ‘delivery framework’ to define a specific and appropriate SEA for our client. This includes identifying exit indicators along with the inputs required to support them, solvent exit strategies including any and all barriers to exit within a comprehensive Risk Management Framework
A thorough review of the firms existing governance structure will also be conducted to define how the existing mechanisms can be leveraged to effectively monitor and manage a successful solvent exit while ensuring compliance with PRA regulations, with clearly defined roles and responsibilities. Part of this will include ensuring establishing robust data management and reporting systems to meet the documentation requirements outlined in the SEA document.
By the end of this phase, not only will we create a Draft SEEP Template but we will have armed our client with the rules of the road to enable them to execute a successful solvent exit should the need arise.
Testing & Quality Assurance
In the Testing & Quality Assurance phase, Consulting at Davies would carry out activities to check and ensure our clients are fully prepared and equipped to navigate the regulatory landscape with confidence and compliance.
This involves rolling out a comprehensive training programme to equip employees with a clear understanding of how the regulatory changes will impact their day-to-day activities and their respective roles and responsibilities in the event of a solvent wind down.
A carefully crafted test plan will also be created and executed, working with our clients to create exhaustive test scripts that will rigorously stress test the revised operating models to confirm they effectively flag trigger indicators.
Dress Rehearsal & Implementation
Last but not least, Consulting at Davies would partner with our client to conduct a full end-to-end dress rehearsal, of a solvent exit from the identification of solvent exit prospect through to the development of a SEEP.
Governance & oversight mechanisms will be reinforced through the promotion of regular governance forums, enabling organisations to effectively monitor processes and outcomes. This will then help businesses maintain continuous improvement initiatives to make sure that they are ready for any further policy or procedure changes that might be required further down the line, especially if additional regulations are created.
Finally, Consulting at Davies would facilitate regulator engagement by providing the PRA with the SEA documentation, demonstrating that our client is fully prepared and compliant for the upcoming reforms.
Consulting at Davies prides itself on the fact that, once these actions have been completed, our clients are well-prepared, compliant and agile; thus, making them ready to navigate the complex landscape of solvent exits with confidence.
To find out more about how we can assist you with any aspect of the points raised above, or your wider requirements, please contact us
