In a 2021 speech, Sam Woods, the CEO of the UK’s Prudential Regulation Authority (PRA), stated that one of the regulator’s focuses for its future work was ease of exit from the market. Acknowledging that a reliably safe exit process is a vital counterpart to facilitating entry, and that insolvency or resolution serve as backstops for the financial system, he confirmed that the PRA was planning to increase confidence that firms can exit the market in an orderly way and without disturbance. A few years later, what was announced in 2021 and reflected in the PRA’s 2022/2023 business plan will be coming into force.
On 12 March 2024, the PRA published a policy statement (PS5/24) providing feedback to its June 2023 consultation paper on “solvent exit planning for non-systemic banks and building societies” (CP10/23) and setting out its final policy.
CP10/23 explains that solvent exits have been the most common exit route for non-systemic firms over the last years. While many of these have concluded without issue, some have been “challenging and protracted”, with issues arising from a lack of good forward planning (such that, for example, potential barriers to an orderly exit were only identified during execution). Better planning and a clear policy on how firms should prepare in advance for a solvent exit are therefore needed to reduce these issues, and the PRA considers that the changes being introduced will increase the likelihood of successful, more efficient and less costly solvent exits for smaller firms.
The new rules focus on solvent exit planning as part of a firm’s business-as-usual (BAU) processes (pursuant to which a solvent exit analysis will need to be maintained) as well as rules applicable when a solvent exit becomes a reasonable prospect (including the preparation of an execution plan).
The final rules largely reflect the proposals put forward by the regulator in CP10/23 and will be reflected in three main sources:
- a new Chapter 7 of the Recovery Plans Part of the PRA Rulebook;
- a new supervisory statement SS2/24 on solvent exit planning for non-systemic banks and building societies; and
- an updated version of the existing supervisory statement SS3/21 (“Non-systemic UK banks: The Prudential Regulation Authority’s approach to new and growing banks”).
In-scope firms (generally smaller UK banks and building societies) will be required to comply with the new rules from 1 October 2025.
In parallel to this work on solvent exits by non-systemic firms, the regulators have also been assessing the application of the resolution regime to smaller firms, including as set out recently in HM Treasury’s consultation on enhancing the special resolution regime (on which we published a blog post earlier this year).
The new rules
As set out in SS2/24, a solvent exit refers to the cessation by a firm of its PRA-regulated activities while remaining solvent. As part of this, the firm transfers or repays all deposits and should continue to meet liabilities when they fall due. The solvent exit ends with the removal of deposit-taking activity from the firm’s Part 4A permission (or the cancellation of its Part 4A permission).
All firms, including non-systemic banks, are required to undertake recovery and resolution planning. However, no particular planning requirements currently apply for solvent exits, which the PRA considers has caused firms to be underprepared in some cases (as referred to above).
The PRA’s measures are intended to address this by introducing new rules for two stages of the solvent exit process. Firms within the scope of these rules are UK-incorporated banks and building societies which are (a) not subject to the Operational Continuity Part of the PRA Rulebook or (b) not members of a group which is a global systemically important institution (G-SII) or an other systemically important institution (O-SII). The measures do not apply to credit unions or branches of third-country groups.
- Planning for a solvent exit as part of BAU activities: solvent exit analysis (SEA)
- Chapter 7 of the Recovery Plans Part will require all in-scope firms to produce and maintain an SEA, which will document the firm’s BAU preparations to ensure that, if necessary, it could cease PRA-regulated activities in a timely and orderly manner. This is intended to help to reduce the risk that firms are unprepared or unaware of the associated costs and timelines. The SEA must be provided to the PRA upon request.
- Guidance on the preparation of SEAs is set out in the new SS2/24. SEAs should cover, at a minimum, points such as solvent exit actions (i.e. the actions needed to cease PRA-regulated activities while remaining solvent), solvent exit indicators (which would inform the firm that a solvent exit may need to be initiated), potential barriers and risks, resources and decision-making.
- The level of detail in a firm’s SEA should be proportionate to its nature, scale and complexity. Existing work on recovery planning can be leveraged, but the PRA notes that firms should not assume that existing recovery options would be appropriate or available for a solvent exit (for example, the transfer or repayment of deposits may not be existing recovery actions).
- Steps once solvent exit is a reasonable prospect: solvent exit execution plan (SEEP)
- The PRA also clarifies its expectations of firms for whom solvent exit has become a reasonable prospect in SS2/24.
- Firms will need to produce (and provide to the PRA) a detailed SEEP once there is a reasonable prospect that they may need to execute a solvent exit or when this is requested by the PRA. This should include sufficient detail to explain how the firm will complete the cessation of its PRA-regulated activities and should be appropriate considering, for example, the firm’s business model, risk strategy and the surrounding circumstances which led to the solvent exit being initiated. The SEA can be used as a starting point.
- During the execution of the solvent exit, SS2/24 imposes requirements on firms to monitor and manage the process, including keeping the PRA and other stakeholders informed and, on an ongoing basis, assessing whether the solvent exit actions remain feasible and appropriate.
Based on the responses received to CP10/23, the PRA made a number of clarifications to the draft wording of SS2/24, but much of the substance of the proposals has been retained in the final rules.
As noted above, firms will be required to comply with the new rules from 1 October 2025. The PRA believes that 18 months is a sufficiently long period for firms to be able to implement a solvent exit policy, not least because existing work, such as on recovery planning, should provide a starting point.
Expected benefits of the new rules
The PRA considers that the new measures would increase the likelihood of successful, more efficient and less costly solvent exits. This is expected to result in a variety of benefits for customers and the market, including:
- reduced disruption to firms’ customers and to the wider market as a result of firm exits;
- increased confidence in firms;
- a more competitive market, in which new firms can enter and unviable firms can leave more easily;
- reduced costs to the Financial Services Compensation Scheme (FSCS) as, pursuant to a solvent exit, deposits would be repaid in full or transferred, rather than reliance being placed on the FSCS’s deposit protection (as it might be for insolvency or resolution); and
- support for the UK’s position as a competitive and attractive place to do business, with a robust regulatory regime.
The PRA considers that these benefits outweigh the increased planning and compliance costs for firms.
In CP10/23, the PRA acknowledged that solvent exits may not always be the most appropriate route, such as where a bank is failing too quickly. However, where there is time for preparations, the PRA considers that such greater advance planning would ensure that firms are better prepared to execute a solvent exit.
