Payments and e-money: UK FCA emphasises importance of proportionate risk frameworks to firms’ sustainable growth

What should firms be thinking about and how can Hogan Lovells help?

The government’s clear indication that it would like regulators to allow more risk in the system in order to support economic growth means that the regulatory spotlight is likely to be falling on solvent exit considerations with increasing regularity in the coming months and years. We are already seeing more emphasis on wind-down plans in the FCA’s authorisations process, and it has chosen this area for this latest payments and e-money multi-firm review. In a webinar on its Payments Strategy and the Consumer Duty on 10 July 2025, the FCA emphasised that wind-down planning is needed well before wind-down happens. It also stressed that firms should make sure they have usable and practical wind-down plans for use in solvent as well as insolvent wind-downs.

With the above in mind, ensuring effective management of risk (including risk of market exit) within your business should be top of your “to do” list. The combination of our legal and consulting teams is ideally suited to assist you in reviewing your current risk management framework and wind-down plan, and how these might have to be improved. Our combined offering can provide you with a full range of services, and clear guidance on how the solutions can be applied within your business.

What did the FCA find?

The focus of the review was on enterprise and liquidity risk management and wind-down planning, as the FCA had already highlighted these as priority areas in portfolio letters in 2023 and 2025. There was no in-depth assessment of firms’ compliance with safeguarding rules, with the review instead covering the implications of safeguarding on financial resilience and wind-down planning. The FCA made reference to its September 2024 consultation on safeguarding (as to which, see this Our Thinking article).

None of the firms that the FCA reviewed fully met its expectations, in particular by failing to follow the guidance on assessing adequate financial resources in FG20/1.

The 3 main areas of improvement for firms’ risk management frameworks are:  

Enterprise-wide risk management frameworks

• These remain inadequate. The FCA wants to see firms leveraging the guidance in FG20/1 to embed its risk management fundamentals.
• Risk management frameworks should be commensurate with the complexity and scope of activities, enabling firms to identify and document material risks specific to their business model.
• The risk management framework should be used to support informed decision-making.
• A risk appetite should be established and agreed at board level and reviewed at least annually, with quantitative elements calibrated through risk assessment and stress testing.
• Firms should adopt an enterprise-wide view of risk, rather than a siloed approach.
• Firms should hold financial resources that are proportionate to their activities and risk profile, not just the minimum regulatory requirement.
• Stress testing should be employed to understand business vulnerabilities and potential losses in relevant scenarios, as well as to calibrate risk appetite, risk tolerances, wind-down triggers and adequate resources.>
• Firms need to differentiate between capital and liquidity resources.

Liquidity risk management

• Risk management frameworks should explicitly consider liquidity risk, and stress testing should be used to inform liquidity risk appetite, key risk indicators, limits and adequate resources.
• Liquidity risk frameworks should model unexpected stress events as well as routine payments such as customer withdrawals, regular operational costs and margin payments. This should result in firms holding adequate liquidity resources considering the impact of stress events and their risk appetite.
• All available information about the liquidity position (eg the amount of credit facilities extended to customers to cover margin calls) should be included in the stress testing.
• A contingency funding plan should be set up to define reliable funding sources and clearly delegated management actions.
• All liquidity risks arising from safeguarding arrangements, including shortfalls, should be understood, and the reduced market liquidity for safeguarded assets should be considered.
• The impact of a stress on uncommitted intra-group liquidity facilities should be factored into the assessment of liquidity adequacy

Consideration of group risk

• Firms should be identifying and managing material group risks and tailoring group risk management policies to their specific conditions.
• Firms need to document conflicts of interest policy and lines of authority over intra-group arrangements, including access to shared financial resources.<
• The interlinkages between individual firm wind-down plans and group wind-down plans need to be considered.

While the FCA found that firms have made efforts to make sure wind-down plans (WDPs) have a structure in accordance with its expectations, the underlying content often falls short by being incomplete, high-level and not aligned with the risk management framework. This includes inadequate triggers and links between financial resources held and resources required for wind-down.

WDPs and related artefacts should:

• Contain sufficient detail and consider all material activities, making them operable;
• Be structured and documented appropriately, assessing stresses and quantifying required resources;
• Ensure integration of wind-down planning with the firm’s wider risk management framework;
• Include reverse stress testing to inform points of non-viability and wind-down triggers, and consider the impact of stresses on resources before the start of wind-down;
• Provide for detailed modelling of resources required for wind-down including advisory fees, redundancy and employee retention costs;
• Identify key risks to the WDP, considering how they could crystallise and putting in place mitigation measures such as holding additional resources;
• Include regular testing of WDP operability via run-throughs or workshops;
• Consider triggers around safeguarding asset shortages or lapsing of safeguarding insurance, where relevant, as set out in paragraph 10.65 of the FCA’s Payments and E-money Approach Document.

The FCA emphasises that WDPs need to have realistic timescales and assessments of how financial and non-financial resources are maintained while the firm exits the market. One of the areas for improvement that it singles out is the need to analyse how the wind-down timeline can be delayed by issues such as safeguarding, financial crime or contacting customers (eg the need to consider meeting obligations to safeguard residual customer funds for 6 years).

What’s next?

Firms now need to compare the FCA’s findings to their own arrangements, identify where they may need to invest in risk management and wind-down planning, and make any required improvements. The FCA encourages firms to review:

• FG20/1, which outlines its expectations of good practice in risk management; and
• its Wind-down Planning Guide and TR22/1 (Observations on wind-down planning: liquidity, triggers and intragroup dependencies) to help them in developing their WDPs.

It will continue to engage with the sector as it ensures it has effective risk management and WDPs in place.

Authored by Roger Tym, Mark Aengenheister, and Virginia Montgomery.