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.