How to navigate the FCA's financial resources assessment

• 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. 

FCA’s expectations of firms in assessing the sustainability of the business model 

The FCA expects firms to consider forward-looking financial projections and strategic plans, for both business as usual and adverse circumstances that are outside their normal and direct control.

This helps a firm to understand the risks to viability of its business model and the sustainability of its strategy over a period of at least three years.

Business as usual

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

Your normal business planning and financial projections should contain plausible and consistent assumptions.

When considering plans, for example for increasing client numbers and generating more income or potentially for future acquisitions, you need to factor in appropriate assumptions relating to general economic and political factors, market dynamics, growth in volume and profitability of your key products and services and geographical factors where relevant.  

Stressed circumstances

The FCA believes that firms should provide forward-looking projections under ‘severe but plausible adverse circumstances’ and consider them against the firm’s own ‘risk appetite for survival’.

Wind-down planning

Discretionary management firms may be more familiar with the concept than advisory firms, but it’s something for all firms to be aware of and to consider.

You are expected to undertake both a qualitative and quantitative assessment.

The qualitative assessment should consider: