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.
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:
- Discretionary portfolio managers may breach their mandate, exposing investors to risks outside of their profile or losses from unsuitable investments
- Financial advisors may provide unsuitable advice, for example on pension transfers or other investments, resulting in customers losing money from mis-selling
- Insurance intermediaries exposed to negligence claims which may not be covered by the firm’s professional indemnity insurance policy (for example, where the intermediary places business with an insurer that becomes insolvent, and there is an exclusion in the PII policy for using unrated insurers) potentially causing losses to customers and a disorderly wind-down of the intermediary
Assessing the likelihood and impact of harm
The FCA expects firms to assess how their actions, the actions of others performing outsourced functions, or the failure of systems and controls, might cause harm to consumers or financial markets.
The potential events that could cause harm will depend on the type of firm.
For example, firms that deal on their own account, hold client money hold positions in investments, currencies and commodities are exposed to a wider range of risks than your firm is likely to be.
However all firms should naturally take a prudent approach to accounting for the firm’s assets and liabilities, the possibility of non-recoverable debts and the holding of potentially illiquid assets where relevant.