In the event of my death – the concept of a 'living will'

Financial Services Authority chairman Adair Turner recently voiced one of the more intriguing ideas to prevent future economic collapse on the scale we’ve suffered in the past couple of years. ‘Systematically important businesses’ ­ in the regulator’s case, large banks, brokers, insurers and the like ­ would write their own ‘living will’, a plan that would govern the way a business is broken up and the assets managed in the event of its demise.

“Living wills will be a forcing device for the clarification and simplification of legal structures,” Turner told the Financial Times. “In the past, authorities around the world have tended to be tolerant of the proliferation of complex legal structures designed to maximise regulatory and tax arbitrage. Now we may have to demand clarity of legal structure.”

How it works
The FSA has been characteristically mute on Turner’s suggestion, leaving observers to speculate on how exactly the plans would work. The best guesses so far suggest that companies would need to outline what exactly they would do should they no longer fulfil going concern requirements: which businesses they would sell and how they would handle creditors. The plan could also require them to demonstrate how redundancies would be handled, which directors would stay on to oversee the wind-down, which assets and entities would be disposed of and how. It is a good idea for all companies to consider as a point of best practice or responsible business in the current business climate.

Having worked closely with an FSA-regulated company recently on creating such a plan, Mark Kelly, a senior manager in the Business Risk Services group at Grant Thornton, is one of the few people to have any practical experience in this field. “The business was a little shaky to begin so the regulator took the unusual step of intervening and asking directors to come up with a coherent wind-down plan that detailed exactly what would happen in the event of a collapse,” he explains.

“The FSA told them to cover a lot of things ­ how [the plan] should be written, how to return money to stakeholders,” says Kelly. “They put together a plan covering everything you need to know about closing down, from the need to organise creditors to turning the lights off and closing the doors.”

Kelly says the business he worked with managed to put a plan together in a matter of weeks. “I’ve seen and reviewed the plan they came up with and it was almost like a business start-up plan in reverse ­ unpicking the supplier relationships, looking at the staffing issues. A big factor was letting staff go at the right time.”

Alongside that, companies would need to produce a coherent legal framework of its subsidiary companies and explain what would happen to each one in a wind-down. Considering HSBC has around 2,000 of these, as an example, it’s easy to see why the FSA deems this plan to be necessary.

So, how does it work?
So how exactly would such a plan work? “There’s a timeline here imposed on you, principally by the contracts you’ve taken out on premises and suppliers and infrastructure and so on,” says Kelly. “So take the longest of those, assume you’ll have to pay until the end and it will give you the end point of the critical path. Also, the company had to ensure that it kept key people locked in ­ the people you need to wind things down properly. So one of the principle things in the HR area was getting the right bonus structures in place for key staff to keep them engaged until the end.”

The FSA currently demands regulated firms have adequate control and compliance coverage anyway, so it’s unlikely they would want to see companies appointing new people in those areas for the wind-down period, raising the question of how to secure the services of the compliance officer and the CFO until the end.

“We’re starting from a complicated landscape,” says one London-based lawyer who works with banks on their risk profiles. “A lot of the important international firms have got to a state of such complexity, either organically or through acquisition, that trying to move a position where we could get to an orderly wind-down will take quite some time.”

Meanwhile, some observers have suggested the FSA could use compliance with any ‘living will’ directive to drive capital adequacy requirements, or even block acquisitions. And alongside that is the question of cost.

It would certainly be a costly exercise for a large bank or another large organisation to come up with a meaningful plan, especially with businesses and their markets changing rapidly. But they do say a stitch in time saves nine.