FCA is consulting on the approach it takes to assessing adequate financial resources – and what it means by the term. The paper has been prompted by the levels of compensation FSCS has paid out relating to firms that are not subject to detailed prudential standards. FCA says firms should have resources to match their risks, so there will be fewer failures, which place a disproportionate cost on other firms.
When assessing firms’ financial resources, and their compliance with the Threshold Conditions, FCA will look at measures firms have taken to identify their risks and manage them. It expects firms to take a forward-looking approach to risks and how they evolve throughout the economic cycle. It expects them to review this at least annually and strike a balance between ensuring financial soundness while avoiding excessive costs. They should understand the vulnerabilities in their business models so they have access to adequate capital and should have risk management and controls to detect and remedy problems.
FCA’s own resources are finite, so it focuses on firms and sectors with the most potential to fail. Part of its toolkit includes requesting firms to submit their own assessments of financial resources and wind-down planning. The paper aims to show firms what FCA will look at when reviewing these assessments.
What is “adequate financial resources” will depend, of course on the firm. Each firm must at all time have an amount of capital at least equal to its assessment of what is necessary. FCA expects that firms have adequate capital to ensure they are able to incur losses and remain solvent or fail in an orderly way, and to drive the right behaviour. Separately, they need to consider the need for and quality of their liquid resources.
The paper makes it clear that good culture and governance will drive compliance – and that FCA will expect firms to have carefully considered the potential harms of their specific businesses and additional risks that might deplete their levels of available resource. In a failure scenario, FCA expects firms to have thought of credible wind down plans with realistic timescales.
Consultation closes on 13 September.