Financial Services Advisory

Recovery Plan for Investment Firms: Top 3 challenges

Ciaran Rogers Ciaran Rogers

Investment firms with an Initial Capital Requirement of €730,000 have an obligation to draw up, maintain and update their Recovery Plan. Additionally, the first quarter of the year is used by investment firms to delineate the approach for the annual iteration of their Recovery Plan.

The main challenges faced by investment firms when drafting, maintaining or updating their recovery plans evolve around three key areas:

Governance arrangements for smaller firms

Governance arrangements play a key part in a recovery plan. An efficient and effective governance allows a clear definition of processes, roles and responsibilities, within a firm, should the recovery plan be activated.

Investment firms, like banks can find it difficult to demonstrate their effective governance processes.

To overcome this challenge, investment firms may consider performing a dry-run exercise to test their governance arrangements. Based on this test crisis event, the firm may be able to highlight areas of improvement and train relevant staff to achieve effectiveness when dealing with the governance of the recovery plan.

Recovery Options

Investment firms, on average, tend to have a lower number of core business lines and a simpler funding structure compared to banks; this does not allow firms to consider the disposal of a business line or debt issuance as potentially feasible recovery options. Thus it restricts the number and type of available recovery options for the firms.

To overcome this restriction, investment firms may consider recovery options to be implemented under idiosyncratic or systemic scenarios that would be otherwise considered business as usual options (e.g. risk exposure reduction).

Stressed Scenarios

Investment firms are required to have three different stress scenarios in their recovery plan one idiosyncratic, one systemic-wide and one combined.

The three scenarios should be based on events that are most relevant to the firm and should endanger the long-term viability of the firm without the implementation of recovery options.

Investment firms, on average, tend to have higher capital positions than banks. Thus it may be difficult for an investment firm to decide on a stress scenario severe enough to erode their capital positions.

To overcome this restriction, investment firms may assess the full spectrum of events that could realistically threaten their financial viability for the different scenarios (e.g. potential fines from National Competent Authorities or default of a main counterparty).

Why Grant Thornton?

Grant Thornton Prudential Risk assists a diverse range of financial institutions in the interpretation and the completion of their recovery planning requirements. Our team has extensive knowledge of the legislation and guidance underpinning recovery planning and also has a proven track record of assisting institutions with reviewing and drafting their recovery plans.