FCA Framework for assessing adequate financial resources

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.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

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Our View

In the 5 years between 2013 and 2017, the Financial Services Compensation Scheme (FSCS) have paid a total of £846 million in compensation for claims made against FCA solo-regulated firms.

The inability to compensate consumers, and the transfer of these costs to other market participants via the FSCS levy, is unfair and places an unnecessary burden on other firms. If firms have resources to match their risk, there should be fewer disorderly firm failures, with lower costs passed onto the industry via the FSCS levy.

Action Required By You

We would encourage firms to respond to the consultation on the basis its outcome will have an impact on all firms by the closing date of 13 September 2019.

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Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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