Financial Conduct Authority  

FCA clarifies position on capital adequacy

FCA clarifies position on capital adequacy

Government loans granted to firms in a bid to tackle the coronavirus fallout cannot be used to meet capital adequacy requirements, the financial regulator has warned. 

In a Dear CEO letter sent yesterday (March 31) the Financial Conduct Authority gave its most decisive direction yet in response to the global pandemic and associated market turbulence. 

The FCA confirmed government loans cannot be used to meet capital adequacy requirements, as they do not "meet the definition of capital".

The regulator added: "Government schemes to help firms through this period can be used to help firms plan for how they will meet debts as they fall due and help firms remain solvent in the immediate period."

In a five page letter the watchdog said it had received hundreds of requests for regulatory leniency and rule adaptations from firms and trade bodies in light of the coronavirus outbreak. 

The FCA said some firms had asked for clarification on how loans pledged as part of the government's emergency response to the national lockdown should be treated in respect of capital adequacy rules.

Last month chancellor Rishi Sunak announced a £330bn war chest of loans and grants to protect businesses against the financial difficulties caused by the coronavirus.

For small to medium sized businesses in particular, the government pledged to extend its new business interruption loan scheme to provide loans of up to £5m per business with no interest for six months.

In an update last month the FCA promised "flexibility" to regulated firms which may struggle financially during the pandemic and urging firms to use capital and liquidity buffers in "times of stress".

The watchdog also asked companies which did need to exit the market to do so "in an orderly way while taking steps to reduce the harm to consumers and the markets".

The FCA said in a small number of cases requests for changes to its regulatory approach had been refused, because the outcome was not in the interests of consumers or would hamper the watchdog in managing the crisis situation. 

It said: "In the case of requests that we consider to be opportunistic and designed to undermine consumer protection, we will reflect on what this tells us about the firms involved or conduct in the sector."

rachel.mortimer@ft.com

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