How to navigate the FCA's financial resources assessment

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.

This is with a view that adequate resources (both financial and non-financial) are maintained while the firm exits the market in an orderly way.

Risk management and systems and controls should be supported by effective governance, leadership and a purpose.

These elements will drive a culture to allow firms to identify, assess, monitor and mitigate the risk of harm.

‘What if’ scenarios should be considered to identify the amount and type of financial resources needed to put things wright when they do go wrong.

Adequate capital resources 

The FCA expects firms to have an amount of capital which, at all times, is equal to or higher than its assessment of what is necessary.

This includes the type and quality of capital and its ability to be used in a going concern or wind-down situation.

Adequate liquid resources 

Firms need adequate liquid resources to meet their debts as they fall due.

Stressed circumstances could result in increased outflows and enhance risks of mismatched cash flows. 

Risk identification and appetite

This relates to the risk appetite of the firm itself. Each firm is expected to identify and understand the risks that arise from their activities and the way they conduct their business.

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.

Identifying and assessing the risk of harm

Identifying and assessing the potential harm to consumers and markets is a fundamental part of assessing adequate financial resources.

This should help a firm understand what can go wrong, so that it can consider if its controls and financial resources are enough to minimise the risk of harm.

Disruption to continuity of service

Failure to invest adequately in people, processes, and systems and controls, may increase the risk of disruption in the continuity of services firms provide.

FCA’s expectations for identifying harm

Firms are expected to identify all significant harms related to the activities they undertake.

To do this, you can consider relevant topic-specific FCA guidance such as operational resilience, remuneration practices and product governance.

Some illustrative examples of potential harms caused by different types of firms are: