Prudential Regulation Authority Rulebook

2.1

This Chapter sets out the PRA’s expectations for how a firm should prepare for an orderly solvent exit¹⁷ as part of its BAU activities. These expectations apply regardless of how unlikely or distant a prospect solvent exit may seem to the firm. If and when the execution of a solvent exit becomes a reasonable prospect, the firm should produce a ‘solvent exit execution plan’ as described in Chapter 3.

2.2

A firm should produce a ‘solvent exit analysis’ document to demonstrate that the firm meets the expectations in this Chapter. The solvent exit analysis should include, at a minimum, the below contents, which are elaborated on in the rest of this Chapter:

• solvent exit actions
• solvent exit indicators
• potential barriers and risks
• resources and costs
• communication
• governance and decision-making
• assurance

2.3

The level of detail in the solvent exit analysis should be proportionate to the nature, scale, and complexity of the firm.¹⁸ A firm may find it helpful to include the solvent exit analysis as a discrete section in its recovery plan, but may set out the solvent exit analysis separately if the firm finds it appropriate

2.4

In meeting the expectations in this Chapter, a firm should take account of plausible circumstances that could lead to it needing to execute a solvent exit (see Box A for illustrative examples). A firm may draw on and adapt scenarios developed under the PRA’s recovery planning expectations¹⁹ to inform it of such circumstances.

2.5

A firm should set out in its solvent exit analysis the actions that would be needed to cease its PRA-regulated activities while remaining solvent (‘solvent exit actions’). These will likely comprise several of the firm’s recovery options (eg selling businesses or assets, transferring liabilities),²⁰ augmented and amended to facilitate the firm to complete a solvent exit. A firm’s solvent exit actions should include the transfer and/or repayment of all deposits.

2.6

A firm should set out in its solvent exit analysis the timeline over which the solvent exit actions could be executed, and the extent to which the timing is dependent on internal and external factors. To meet this expectation, a firm may draw on and adapt the analysis of timelines for recovery options under the PRA’s recovery planning expectations.²¹

2.7

A firm should identify and monitor indicators that would inform it about when it may need to initiate a solvent exit and whether the execution of a solvent exit is likely to be successful. A firm should set out these indicators in its solvent exit analysis. The calibration of indicators should be forward-looking and set such that they can provide sufficient warning to the firm to produce a solvent exit execution plan and to execute a solvent exit²² while the firm still has the necessary financial and non-financial resources. These indicators should include financial and non-financial metrics in quantitative and/or qualitative terms.

2.8

A firm should monitor the projected and actual levels of these indicators, as well as their trend. These indicators, alongside other relevant information,²³ should support clear and timely decision-making regarding a solvent exit.

2.9

To meet the expectations in paragraphs 2.7 and 2.8, a firm may draw on and adapt its existing management information framework, and indicator framework developed under the PRA’s recovery planning expectations,²⁴ without necessarily creating and monitoring a new set of indicators.

2.10

A firm should set out in its solvent exit analysis the potential barriers and risks to the execution of a solvent exit, including those that are market-wide and firm-specific (see Box B for illustrative examples).

2.11

A firm should assess how the identified barriers and risks could affect the outcome and effectiveness of the firm’s solvent exit actions. The firm should take reasonable steps in BAU to mitigate or remove any material barriers or risks. The firm should identify whether any remaining barriers or risks could result in an unsuccessful solvent exit.

2.12

A firm should set out, in its solvent exit analysis, the potential dependencies that a decision to execute a solvent exit may rely upon. These may include, but are not limited to, securing requisite advice from external specialists, and any activities (such as producing valuations) that would have to precede such a decision. To meet this expectation, a firm may draw on and adapt the dependencies analysis conducted under the PRA’s recovery planning expectations.²⁷

2.13

A firm should set out in its solvent exit analysis the anticipated impacts of a decision to execute a solvent exit, including how depositors and the wider market may react.²⁸

2.14

A firm should set out in its solvent exit analysis the financial resources, including capital, funding, and liquidity, needed to execute a solvent exit. This may include:

• an assessment of the minimum sale value of assets or portfolios needed to enable a successful solvent exit;
• a breakdown of the firm’s assets or portfolios into those it would need to sell, transfer, or hold to maturity; and
• a breakdown of the firm’s assets or portfolios into those which could be sold in a secondary market, and those for which this is unclear.

2.15

The firm should take into account that the solvent exit itself is likely to lead to additional costs. In addition to costs to cover possible losses (or ‘haircuts’) on the sale of assets or portfolios below book value, these costs may include fees for specialist services, redundancy and retention payments, contract termination penalties, and pension fund deficits. The firm should also identify the absolute minimum level of financial resources needed, below which there would be no reasonable prospect of successfully executing a solvent exit.²⁹

2.16

A firm should set out in its solvent exit analysis the non-financial resources needed to execute a solvent exit, including the cost of maintaining these resources throughout the execution of a solvent exit. Non-financial resources may include: access to external specialist services or advice, a firm’s key staff, operational and outsourcing arrangements, support from other group companies, premises, IT infrastructure, and certain data.³⁰

2.17

In meeting the expectations in paragraphs 2.14 to 2.16, the firm should set out how it could maintain access to the resources needed throughout the execution of a solvent exit. The firm should also take account of the likely resources needed to mitigate or remove any barriers or risks, including managing any negative impacts of a decision to execute a solvent exit.³¹

2.18

A firm should set out in its solvent exit analysis the internal and external stakeholders that may be impacted by a solvent exit. These may include regulators, depositors, customers, creditors, shareholders, staff, outsourced service providers, and other market participants. To meet this expectation, a firm may draw on and adapt the communication plan developed under the PRA’s recovery planning expectations.³²

2.19

A firm should set out in its solvent exit analysis how and when it would communicate to stakeholders, both before and during the execution of a solvent exit. A firm should assess how different stakeholders may react to the firm’s decision to initiate a solvent exit. In particular, a firm should assess how it would manage and mitigate any negative impacts of a stakeholder’s reaction to the firm’s solvent exit (eg potential depositor runs, resignation of key staff, demands for full and final settlement from creditors).

2.20

A firm should set up clear governance arrangements, with a named executive accountable, for:

• the firm’s BAU preparations for a solvent exit, including the review and approval of the solvent exit analysis;
• escalation and decision-making regarding a solvent exit, including whether a solvent exit execution plan should be produced, and whether, how and when the firm would initiate a solvent exit;³³ and
• monitoring the execution of a solvent exit, including whether the firm should take further action to facilitate the completion of a solvent exit, or whether a solvent exit is no longer feasible or appropriate given the firm’s circumstances.³⁴

2.21

A firm may adopt the governance arrangements developed under the PRA’s recovery planning expectations³⁵ to meet the expectations in paragraph 2.20.

2.22

A firm should ensure that it has the capabilities to produce adequate and appropriate information, within a reasonable amount of time, to inform decisions regarding a solvent exit. The firm should be able to refresh relevant data (eg balance sheet, profitability, exit valuations, anticipated costs); be able to conduct appropriate analysis; and be able to make realistic projections of the firm’s capital, funding, and liquidity for the anticipated timeline over which a solvent exit would be executed.

2.23

If a firm anticipates using external specialists to meet the expectations in paragraph 2.22, the firm should be prepared to procure them within a reasonable amount of time. The firm should also ensure that the external specialists would have access to the data needed.

2.24

A firm should be able to make timely decisions, with necessary approvals,³⁶ regarding the execution of a solvent exit, including whether a solvent exit should be initiated. The firm should take account of relevant information and solvent exit indicators when it makes decisions.

2.25

A firm should undertake adequate assurance activities for its solvent exit preparations as described in this Chapter. These assurance activities can be performed internally, or externally as the firm considers appropriate.³⁷ The firm should review and update the solvent exit analysis whenever a material change has taken place that may affect its preparations for a solvent exit, and at least once every three years.³⁸ The accountable executive should ensure that the solvent exit analysis is approved in accordance with the firm’s governance arrangements.³⁹ The accountable executive should also confirm that the firm meets the expectations in this SS. The firm should be able to provide to the PRA on request the current version of its solvent exit analysis.⁴⁰