However, regulators are now turning their attention to non-systemic banks and building societies, and to insurers, with significant implications across multiple areas of their operations.

The factors which can contribute to a potential firm failure have evolved considerably in recent years. Perceived vulnerabilities have been amplified by greater digital connectivity and the speed at which information now travels. As seen in banks in 2023, the vast reach of social media can quickly expose weaknesses and accelerate deposit outflows. This can exacerbate financial stress, leading to liquidity challenges and potentially triggering a broader crisis of confidence in the financial system.

The Bank of England (BoE) and Prudential Regulation Authority (PRA) overarching concern is that firms of all sizes can withdraw from the market without detrimental effects on customers or the wider financial system. Hence the decision to focus on solvent exit planning for a wider set of firms and activities. Larger banks are not covered under the solvent exit policy as they are already subject to the PRA trading activity wind-down requirements, effective from 3 March 2025.

What is solvent exit?

Solvent exit facilitates the orderly exit of firms from regulated activities. This means:

• First, ceasing activities such as deposit-taking or writing new insurance business, while maintaining solvency
• Initiating the repayment of deposits or, in an insurance context, continuing to meet claims on existing policyholder liabilities
• Then, for banks, completing full repayment or transfer of all deposits and for insurers, entering into solvent run off and/or transferring portfolios to another firm

The PRA's solvent exit policy will sit alongside recovery and resolution as part of the planning toolkit. The PRA believes that embedding solvent exit analysis and planning in business as usual (BAU) activities will:

• Help mitigate the risk of firms being unprepared for a solvent exit or unaware of the costs and time involved ― thereby increasing the likelihood of a successful, more efficient and less costly exit
• Reduce the risk of contagion and disruption in the wider markets
• Reduce the likelihood of costs of exit being passed on to industry through the Financial Services Compensation Scheme (FSCS)
• Support a more dynamic, competitive market by facilitating the exit of non-viable firms

What are the PRA expectations?

Requirements for non-systemic banks and building societies were finalised in March 2024. The proposals for insurers are under consultation and are expected to be finalised in the second half of 2024.

By Q3 2025 for non-systemic banks and building societies, and by Q4 2025 for insurers, all relevant firms, no matter how unlikely the prospect of a solvent exit may seem, must have prepared a Solvent Exit Analysis (SEA) as part of BAU. They must also have capabilities in place to draft a detailed Solvent Exit Execution Plan (SEEP) and monitor and manage a solvent exit if this becomes a reasonable prospect;

Further detail:

• The SEA may draw on the existing recovery plan and must be provided to the PRA upon request
• At a minimum, the SEA should include solvent exit actions, solvent exit indicators, potential barriers and risks, resources and costs, communication, governance and decision making and assurance
• The level of detail in the analysis should be proportionate to the nature, scale, and complexity of the firm
• The analysis should take account of plausible circumstances that could lead to solvent exit
• The SEA should be used as the starting point for a firm's SEEP
• The SEEP should be prepared within a reasonable amount of time (for insurers within one month of reasonable prospect) and include:
  
  • Identification and mitigation of barriers and risks
  • A communication plan for stakeholders; including customers
  • A detailed action plan for execution
  • An assessment of financial and non-financial resources needed to complete the execution and how the firm will monitor and maintain access to these resources
  • Governance arrangements
  • Organisation structure, operating model and internal processes

• A firm's board of directors, or other appropriate governance committees should provide sufficient challenge on the execution plan, and review and approve it
• Firms should support any underpinning assumptions with appropriate evidence

Requirements for assurance and review

The SEA should be updated whenever there is a material change that might affect the firm preparations for a solvent exit, and at least once every three years.
The PRA also proposes that a firm undertake adequate assurance activities for its solvent exit preparations. In doing so, it may choose to use external specialists as it considers appropriate.
The PRA intends to engage with firms regarding the review of, and request for, a firm SEA as appropriate.

How should firms be preparing?

In preparation for 2025, firms will need to consider four key elements:

• Capital and funding including planning, scenario analysis and forecasting
• Continuity of operations including people analysis and implications on areas such as HR, legal and redundancy arrangements. Firms should also focus on their reliance on intragroup relationships and services (e.g. capital support and technology) and third party outsourcing or other relationships
• Customer outcomes and conduct alongside prudential outcomes, firms must also consider consequential conduct risk impacts and balance their own commercial interests with those of their customers
• Communications communication strategy can have a critical impact on stakeholder and market confidence, and is especially important in the digital age where information travels very rapidly and across multiple channels

The solvent exit analysis process should drive out the main barriers and risks to be overcome by firms, creating feedback loops that enable them to make effective decisions for both the solvent exit requirements and their recovery planning exercises.;

Firms have no time to waste in building out and embedding the necessary capabilities to develop a solvent exit analysis and solvent exit execution plan. There are business upsides too; although driven by regulatory change, BAU solvent exit planning presents an opportunity for firms to conduct a thorough review of their activities and operations and achieve tangible business benefits, including:

• More granular understanding of holdings
• Better risk identification and quantification
• More effective capital deployment
• More accurate and efficient use of data
• Better external communication strategies
• Enhanced restructuring capabilities
• Consideration of wider conduct risk impacts

For both banks and insurers, preparing and maintaining an effective solvent exit plan requires thoughtful consideration of what is required to maintain solvency and/or services to customers. It also requires input from all areas of the firm including Risk, Actuarial, Finance, Legal, Compliance, Operations, Investment, HR and Company Secretariat - with interlinkages across different elements. Effective governance and programme management of the SEA will thus be a challenge in itself.