Financial Conduct Authority  

How to navigate the FCA's financial resources assessment

  • Explain how firms should conduct their annual assessments
  • Explain difference between capital and liquid resources
  • Identify FCA’s expectations for identifying harm
CPD
Approx.30min
How to navigate the FCA's financial resources assessment

When the Covid-19 pandemic began to affect day-to-day business, the FCA announced its intention to delay some of its planned activities, and it provided some leeway on regulatory deadlines.

Despite these measures, it’s not been a quiet spring or summer on the regulatory front.

In addition to the pension transfer papers issued in early June, the FCA has been very active with its communications relating to financial resource requirements, including its financial resilience survey and two papers on assessment of adequate financial resources and proposals for a new UK prudential regime for firms with current Mifid status.

While the survey is positioned as an information-gathering exercise, to assess the effect of the pandemic on the financial position of regulated businesses, adequate resources within firms has been a focus of the FCA for many years – It’s focus is now much sharper.   

The survey is aimed at a range of firms, including advisers and intermediaries as well as platforms and wealth management firms.

Your firm may not have received it yet. It will be sent periodically (possibly quarterly) until most firms have received it, but there are no timescales confirmed.  

The financial resource requirements were updated for intermediary firms in 2016, to include an income-based requirement as well as the minimum monetary amount.

Ongoing monitoring and recent events such as significant increases in FSCS claims and growing concerns over professional indemnity insurance have resulted in additional finalised guidance from the FCA that is immediately applicable.       

Between 2013 and 2017, the Financial Services Compensation Scheme (FSCS) paid £846m in compensation for claims made against FCA solo-regulated firms.

Over 70 per cent of these are for firms not subject to detailed prudential standards.

This would include firms such as Sipp operators, payment services firms and limited permissions consumer credit firms.

The FCA views the inability to compensate consumers, and the transfer of these costs to other market participants via the FSCS levy, as unfair and it places an unnecessary burden on other firms.

If firms have sufficient resources to match their risk, there should be fewer firm failures, with lower costs passed onto the industry via the FSCS levy. 

Firms are therefore expected to assess their adequate financial resources in relation to the risk of harm and the complexity of their business. 

What does this mean in practical terms?

All firms are now expected to conduct an assessment, at least annually.

Firms should consider a forward-looking approach to risks, reflect upon the risks to which the firm is exposed as well as the amount of risk it poses, and ensure they are financially sound while avoiding excessive costs, which could hinder the firm from carrying out its business in a viable way.

To reduce the impact of failure, the FCA expects firms to consider the scenarios leading to financial stress, explore recovery options and, as a last resort, wind down its business.