The FCA is consulting on a new framework for assessing adequate financial resources in firms in CP19/20.
The aim of the FCA in the assessment of adequate financial resources is to improve the way firms operate so that they can prevent harm occurring, improve controls, consider the risk in their activities and put things right when they go wrong. It is not the intention to increase general levels of financial resources across financial services but to take a proportionate risk-based approach to the supervision of firms.
The role of adequate financial resources in minimising harm
Adequacy of financial resources is designed to:
- enable firms to remain financially viable and to provide services through the economic cycle;
- enable an orderly wind-down without causing undue economic harm to consumers or to the integrity of the UK financial system.
Lack of financial prudence may cause risk. For example, poor financial management can lead to poor conduct, such as prioritising short-term revenue generation over consumers’ interests. This could lead to a firm’s failure and result in serious harm to consumers and financial markets.
Every firm authorised under the Financial Services and Markets Act 2000 (FSMA) must meet threshold conditions, requiring firms to have appropriate resources (see COND 2.4). This means a firm’s resources (both financial and non-financial) must be appropriate to the regulated activities a firm carries on or seeks to carry on.
The role of the FCA is to assess if a firm has adequate financial resources (i.e. the ability to meet its debts when they fall due). They also consider whether firms have taken reasonable steps to identify and measure its risks, have appropriate systems, controls and resource to measure risks prudently at all times, and have access to adequate capital to support the business ensuring that client money and assets are not placed at risk.
Good practice for firms
All firms should assess the risks inherent in their business model, the potential harm that can be caused and ensure that the firm could be run down in an orderly way, if required.
The deadline for giving feedback to the CP is 13 September 2019. The FCA intends to publish its rules in a Policy Statement in late 2019.