The failure of a financial institution is always a cause for concern for regulators, customers, and competitors. However, the preparations that are needed for this worst-case scenario are different depending on the size of an institution. A lot of thought externally and internally is given to systemically important financial institutions, for example, a bank, insurance companies, building societies or other financial institutions whose failure could potentially destabilise either the global or its home country’s economy, leading to a financial crisis. However, away from these “too big to fail” systemic institutions, what thought is given to smaller Non-Systemic Banks and Building Societies? Although these institutions are unlikely to cause wholesale ramifications across the sector, they are still vital to millions of consumers.
To address this, The Prudential Regulation Authority (PRA) has proposed that UK non-systemic banks and building societies should prepare an orderly ‘solvent exit’ as part of their business-as-usual (BAU) activities. Although these institutions should have minimal disruption on economies if they were to disappear, the PRA proposed that a plan should increase the confidence of firms that they can exit the market smoothly and efficiently without the need for a Corporate Insolvency Resolution Process (CIRP).
According to the PRA, ‘solvent exits’ are the most common exit route for non-systemic firms. Solvent exits are typically seen by firms as a smooth and cost-effective method of ceasing operations when a firm’s business model is no longer viable or sustainable, however, this isn’t the case for all. Some firms have run into issues during the process, with potential barriers only appearing once solvent exit execution planning is already underway. Occasionally, these issues can even take months to be resolved, costing firms time and money. An unsuccessful solvent exit can end in insolvency proceedings, resulting in more of the firm’s time and money being wasted.
Through conducting a solvent exit analysis, the PRA believes a firm should increase its likelihood of a successful solvent exit that is more efficient and cost-effective. By preparing in advance, firms can deliver better and more consistent results that benefit not just themselves but also the wider market.
The PRA has proposed changes to SS3/21 – Non-systemic UK banks: The Prudential Regulation Authority’s approach to new and growing banks. These proposed changes would replace the term ‘solvent wind-down’ with ‘solvent exit’, to introduce more accurate language that clarifies the exact nature of the process a firm is going through when ceasing PRA-regulated activities.
The PRA’s objective is to clarify expectations for firms going through the solvent exit process. The proposed expectations include the production of a detailed solvent exit execution plan as well as consistent monitoring and reporting during the solvent exit process. A detailed solvent exit execution plan should produce clearer decision-making and communication in a firm to become the basis of a successful solvent exit. Throughout the solvent exit process, the PRA expects firms to keep them informed through continuous monitoring, which a detailed solvent exit execution plan can assist in. The PRA’s proposed expectations will ensure that any firm entering the solvent exit process, starts with a higher likelihood of a more orderly, timely and easy process that will succeed.
The PRA’s secondary objective is to promote effective international competitiveness of the UK economy. Through the introduction of a detailed solvent exit execution plan, the PRA aims to reduce the risk of disorderly exits, helping to enforce the UK’s financial stability. The PRA’s proposal will promote healthy competition, a fundamental aspect of any well-functioning and dynamic market, allowing the UK to remain a desirable place to conduct business. Trusted and sensible regulatory standards that enforce stability are a key component in building trust amongst investors, firms, and other regulators.
The Cost-Benefit Analysis of Exit Planning
- Increased likelihood of a successful solvent exit – By preparing for a solvent exit as part of BAU, firms can conduct timely and informed decision-making that reduces the risk of loss should they decide to enter a solvent exit route. Improving the likelihood of a firm’s solvent exit success also benefits stakeholders and creditors who are more likely to receive their funds in full and quickly through forward planning.
- More efficient and less costly for firms – The PRA proposes that solvent exit planning during BAU will reduce the time and costs involved should the firm decide to pursue a solvent exit. By preparing in advance, firms will be better informed of the PRA’s expectations of them and have taken into account potential risks during a solvent exit process resulting in a more efficient process with fewer delays.
- Reduce disruption to the UK economy – The increase in successful solvent exits will reduce disruption to the wider market which can commonly occur from miscommunication in disorderly solvent exits that are executed poorly.
- Reduce costs to the Financial Services Compensation Scheme (FSCS) – Unsuccessful solvent exits can result in deposits not being paid in full leading to extra costs being incurred as firms pass the insolvency onto other firms who may fund the FSCS to complete the pay-outs.
- More dynamic and competitive market – Well-informed solvent exit planning will provide confidence to firms allowing them to exit the market more easily. An easy exit strategy will also assure potential investors that they will be able to access their funds should the firm become unsustainable or non-viable, which promotes healthy business practices and supports a well-functioning and competitive market.
How Davies Can Help
From Q3 2025, the PRA is expecting non-systemic banks and building societies to develop solvent exit plans. To ensure all aspects are fully considered, it’s essential to start defining a clear strategy and creating internal governance arrangements to support the new expectations.
Davies provides a specialist capability in legal entity change, having previously worked with systemic banks to meet requirements of Solvent Wind Down regulation.
By utilising our deep domain expertise within our Banking & Markets Practice, we are ideally positioned to support non-systemic banks and building societies in addressing and aligning with PRA Solvent Exit proposals
Contacts
Michael Lutterodt, Partner
Michael Laney, Principal Consultant
Tony Kyriacou, Principal Consultant
