By 1 October 2025, firms will need to have a solvent exit analysis (SEA) in place – regardless of how unlikely or distant a prospect solvent exit may seem to the firm.
Since the consultation plan CP10/23 was published in June 2023, and subsequent supervisory statement SS2/24 published in March 2024, non-systemically important banks and building societies will have been aware of the Bank of England’s expectations. These are to produce an SEA for a solvent exit in both:
More detail and advice on SEA regulatory requirements can be found in our previous overview. Below is a summary of what an SEA should include, with some practical advice to help you prepare:
1 Solvent exit actions
Firms should set out actions that would need to be taken to cease regulated activities while remaining solvent, for example, selling businesses or assets or transferring liabilities. These actions should include how the firm will transfer and repay all deposits, as well as the expected timeline for these actions.
You may also want to consider other actions, for example, a scheme or arrangement or restructuring plan in order to help resolve liabilities and facilitate a solvent outcome.
2 Solvent exit indicators
Firms should identify and monitor key indicators for entering a solvent exit. These indicators should be both financial and non-financial, based on quantitative metrics, and be forward-looking to ensure that any triggers are early enough for firms to initiate a successful solvent exit.
It can be useful to use movement-type indicators, which flag movements in metrics. These may not necessarily breach risk management levels, but could still highlight areas for concern.
The metrics you choose should integrate well with other existing capital and liquidity requirements, such as Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP), and recovery planning.
However, there are some key differences between solvent exit indicators and recovery planning indicators. Unlike recovery planning indicators, once breached solvent exit doesn't become mandatory but instead should trigger the need for key governance committees to consider appropriate actions. When designing and documenting an indicator framework, management should be clear as to whether a trigger is directing the firm towards recovery or towards solvent exit.
Management should also consider what indicator would trigger the need to prepare the more comprehensive solvent exit execution plan (SEEP). This must be produced if there is a ‘reasonable prospect' of going into a solvent exit scenario, or at the PRA’s request.
3 Potential barriers and risks
Firms should outline potential barriers and risks to the execution of a solvent exit, both market-wide and firm-specific.
Examples might include a loss of key staff or a complex legal and corporate structure which complicates the execution of solvent exit actions. The termination of contracts and associated penalties must be considered, and any learnings from this process can be integrated into business as usual (BAU) when drawing up any future contracts.
Management should also consider the existence of untraceable consumers which may delay the completion of a solvent exit, and the potential need to set up contingency arrangements, such as establishing a trust for remaining customers, that would enable a firm to complete a solvent exit. Are there services provided to niche consumer groups (such as, faith-based banking) where it would be difficult to switch to an alternative provider? The behaviour of stakeholders should also be considered, for example, the potential for a bank run on deposits, or increased customer engagement arising out of the communications announcing the wind-down or exit.
4 Resources and costs
Firms need to set out the financial resources, including capital, funding and liquidity needed to execute a solvent exit. This should include a breakdown of assets or portfolios that it would need to sell or transfer. You should consider the level of ‘haircut’ on the sale of assets, especially if a solvent exit is undertaken due to stressed market conditions.
Firms also need to look at the costs of solvent exit, for example, advisory fees, redundancy or retention payments, contract termination penalties or pension fund deficits. From our experience we've identified that parties often underestimate the time and cost of implementing such scenarios. Accordingly, you should ensure that appropriate contingency is built into your SEA.
A key learning from wind-down planning guidance ,which reads across into solvent exit, is the need for costing to be based off clear financial analysis and presented on a granular basis. The fact that many firms still don't do this has led both the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to repeatedly emphasise the importance of doing this.
5 Communication
The SEA should identify internal and external stakeholders, including regulators, depositors, customers, creditors, shareholders, staff, third-party providers and so on. Plans for effective communication should be drawn up, both before and during the solvent exit process. They should include how to mitigate any negative responses from stakeholders, for example, a run on deposits or key staff leaving.
Timing of communications is important, and you need to work to ensure your plan is viable in practice, for example, factoring in how long it will take external stakeholders to digest and respond to information.
It should be possible to leverage existing communication plan frameworks under your recovery planning.
6 Governance and decision making
A nominated individual should oversee and approve the SEA, and be accountable for the escalation and decision making regarding a solvent exit and when to produce a SEEP. There needs to be targeted communication of management information (MI), ensuring actions and responsibilities are clear.
7 Assurance
Firms should review and update the SEA whenever a material change takes place that may affect preparations for a solvent exit, and at least once every three years.
Given the overlap in content, firms should consider developing a SEEP in parallel with an SEA. As a solvent exit becomes more likely (and therefore a SEEP is required in short order), both time and resources will be stretched. Firms may appreciate having a plan that's mostly in place rather than having to start drafting a SEEP during a time of stress.
The PRA recognises that solvent exit planning has considerable overlaps with both wind-down planning and recovery planning. Therefore you should heed the regulators' advice in publications such as: the FCA’s TR22/1 Observations on wind-down planning: liquidity, triggers & intragroup dependencies and the Dear CEO letter issued in May 2024. These give industry feedback on the recovery planning capabilities of approximately 70 non-systemic banks and building societies, identifying areas for improvement and highlighting effective practice examples.
A long-standing concern of the PRA raised in this Dear CEO letter is that firms don't use scenarios of sufficient severity in their scenario testing. When considering solvent exit in a stressed environment, management should look at appropriate scenarios under a wide range of stress levels, and set appropriate indicators, calibration and governance actions accordingly. You also need to ensure recovery capacity is calculated effectively, showcasing calculations in an understandable way for each modelled scenario.
You need critical insight and challenge to your plans as to how these situations play out in reality.
Our team has worked on many solvent exits, as well as restructuring or insolvency procedures for banks and financial services firms. We can advise on the accuracy and usefulness of any SEA and SEEP, both from a financial and non-financial viewpoint.
By challenging your assumptions – for example, around unforeseen costs, timing or quantum of write downs – and providing evidence to back up our viewpoint, especially when considering a stressed scenario, you can be confident that your SEA and SEEP will be both useful and workable – and meet PRA requirements.
For insight and guidance, contact Russell Simpson or Kantilal Pithia.
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