The PRA recently published CP10/23, outlining new rules for solvent exit for non-systemic banks and building societies. The new terminology will replace all regulatory references to solvent wind down to improve accuracy when discussing the end of regulated activities. In-scope firms will need to prepare effective solvent-exit plans, which they can put into practice at short notice.
The PRA aims to help firms fail safely, without risking contagion to other organisations, harming consumers, drawing on taxpayer money or affecting financial stability. This is especially concerning due to the current volatile economic environment, high interest rates, inflation, and the cost-of-living crisis. Recent market events, such as the high-profile collapse of a specialist bank, have contributed to this uncertainty and the regulator needs greater assurance that firms can exit the market safely.
Banks and building societies can currently exit the market through a solvent wind-down or by following a resolution plan. The choice will depend on the firm’s size, activities, financial capacity, systemic importance and timescales, but most non-systemic banks follow the solvent wind-down route. However, the regulator is concerned about the current quality of wind-down plans, and it has recently commissioned a number of s166 reviews in this area.
Insolvency is one of the key business risks when putting wind-down plans into action. But many can wind down effectively before they get to that point and often have months to put their plans into action. This depends on firms implementing good early warning indicators, and effective breach escalation protocols and invocation triggers. These must be appropriately calibrated to allow senior management sufficient time to successfully implement their solvent exit plans as appropriate.
With these longer than expected timeframes, firms can run into unexpected operational barriers – often related to technology, data, third-parties, people or financial market infrastructure, among others. While operational continuity in resolution addresses many of these considerations, that regulation doesn’t apply to solvent wind down planning. So, organisations typically don’t think about these key areas in enough depth.
The changes apply to non-systemically important banks and building societies, which may be less resilient to market changes and periods of financial stress. The PRA have provided an at-a-glance view to help in-scope banks and building societies understand how solvent exit planning fits in with their wider recovery and resolution expectations. Firms should view these exit routes in the context of wider options such as Members Voluntary Liquidation, which winds-up a business while ensuring that all creditors are paid in full.
Source: PRA CP10/23 - Solvent exit planning for non-systemic banks and building societies
New requirements for solvent exit plans will have a significant impact on new and growing banks, and the PRA will update the language in SS3/21 accordingly.
The regulator asks in-scope firms to prepare solvent exit plans from Q3 2025. These plans will be in two parts, consisting of: a solvent exit analysis and a solvent exit execution plan.
The solvent exit analysis must include the following elements and firms can draw from existing recovery plans. The level of detail for each element must be commensurate with the firm’s size, scale and business activities.
Firms must describe how they will cease PRA-regulated activities while staying solvent. This includes potential timelines, and any internal or external factors that may affect them, and key activities such as selling business assets
Firms must identify and monitor key indicators for entering a solvent exit and signalling if it will be successful. Indicators can be qualitative or quantitative, but they must be forward-looking and early enough for firms to initiate a solvent exit while they still retain financial strength.
The plan should set out any market-wide or firm-specific barriers to a successful solvent exit. This includes details of how these risks can affect proceedings, any mitigating actions and how residual risk could prevent a solvent exit. Firms should consider any dependencies that may prevent a firm initiating a solvent exit (such as external advice or additional valuations), and the impact on depositors or the wider market. Other barriers to consider include shared services, such as human resources, customers services or intra-group outsourcing.
A solvent exit analysis must include a breakdown of the financial and non-financial resources needed. For financial resources, this includes the additional cost of the exit itself, such as capital, liquidity, and funding requirements. Firms need to: consider the minimum asset or portfolio sale value needed to support the solvent exit; produce a breakdown of which assets or portfolios the firm needs to hold, sell or transfer; and provide a summary of which ones they could potentially sell in secondary markets. For non-financial resources, they need to consider essential elements such as key staff, premises or IT infrastructure. That includes how to retain them throughout the solvent-exit period and the expected associated cost.
The solvent exit plan will affect stakeholders such as depositors, creditors, shareholders or regulators, and firms need effective communication plans to keep everyone up to date. Plans must include details of how and when and who will update these stakeholders, likely mode of communications, before and during the solvent exit process. They should also consider how to mitigate any negative responses from stakeholders, for example depositors withdrawing cash en masse, or key staff leaving.
Firms need to demonstrate good governance arrangements, with a nominated individual to oversee and approve solvent exit plans. They need to ensure appropriate decision-making processes and escalation routes, and ultimately decide when to initiate the solvent exit execution plan. Throughout the solvent exit, firms must provide regular MI (within meaningful timeframes), which they can refresh regularly to update cost projections. Where businesses need specialist input, they must factor in how they will resource them quickly, with access to all relevant data.
Firms need to update their solvent exit analysis at least every three years, or sooner if there are material changes that may affect it. The responsible individual must make sure plans align to wider governance arrangements and that they meet regulatory expectations.
Firms don’t need to produce solvent exit plans as part of business-as-usual activities. But they'll need to produce one if there’s a reasonable chance of going into a solvent exit scenario, or at the PRA’s request. Building on the solvent exit analysis, execution plans need to consider how firms will put the exit plan into practice and follow key timelines. They'll need to address any barriers, agree governance arrangements, and figure out how they’ll secure the necessary financial and non-financial resources.
There are also deposits to consider, and banks and building societies will need to repay them or transfer them to another provider. Data is a key consideration and firms need to think about how to securely transfer that information, with continuous access to prevent disruption to services. Where firms are storing information with third parties, including personal information, it’s important to look at current contracts, exit clauses and deletion of data in line with UK data protection law. Organisations also need to think about how they’ll stay compliant with broader laws and regulations, manage contractual obligations and put plans into action to vacate business premises. Some customers will inevitably have concerns, and it’s important to effectively manage them.
Firms need to pre-empt these issues and factor them into their playbook, with good communication plans to keep customers up to date and allay any worries.
The PRA expects firms to produce solvent exit plans from Q3 of 2025, and there’s a lot of work to do before then. To get the ball rolling it’s important to set a clear roadmap of the end-goal and what good looks like. This needs significant support from senior management to establish good governance, oversight, and project management – and they need to review and sign off the final plan. Creating synergies with existing regulations, and drawing from recovery plans where possible, will make the most of available resources and maintain alignment on an on-going basis. Setting key milestones, with clear deadlines, accountabilities and escalation routes will help firms stay on track.
Most importantly, solvent exit plans aren't just theoretical. They need to be practical and robust enough to see the business through a solvent exit, without causing financial harm or relying on insolvency. Firms may include decision trees and maps of various options to follow, depending on why they have triggered a solvent exit – this will provide the necessary flexibility to allow them to work in practice
As an integral element of business-as-usual firms need a playbook to keep solvent exit plans up to date. Regular fire drills will check that these plans are realistic and detailed enough to inform a solvent exit. Firms must review any findings from the tests, and feed lessons learned back into the plan for continuous improvement.
Meeting these expectations will take time, and significant resources from across the business. Starting now will help firms meet the 2025 deadline and develop effective plans that look beyond a theoretical application to work in practice.
For more insight and guidance, contact Kantilal Pithia (Financial Services Advisory) or Chris Laverty (Restructuring).
