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CP19/20: Assessing Adequate Financial Resources

FCA Consultation on Assessing Adequate Financial Resources

24th June 2019

On 13th June 2019, the FCA entered into a consultation relating to the assessment of a firm’s adequate financial resources that applies to all solo-regulated firms subject to threshold conditions and/or the Principles for Business. Finalised Rules will be published later this year.

Entitled, CP19/20: Our Framework: Assessing Adequate Financial Resources, the FCA’s recent consultation paper looks to explain the purpose of the regulator’s approach to assessing adequate financial resources and looks to give further guidance on the meaning of ‘adequate’ in their threshold conditions and principles for business.

Click here to read the full Consultation Paper

Details of the Consultation

The Consultation Paper sets out the role of assessing adequate financial resources, what the FCA look for from firms when assessing adequate financial resources and the regulator’s expectations as to the practices firms should adopt in their assessment of their financial resources.

This is being done with the aim that it will then help lead to “appropriate approaches that may result in mitigation of harm to consumers and to the integrity of the UK financial system” by improving the way in which firms operate, with particular focus upon:

• Preventing harm from occurring
• Improving controls
• Having firms consider the risks in their activities; and
• Putting things right when they go wrong

Whilst the FCA has advised its intention is “not to increase general levels of financial resources across financial services” it will in some cases, inevitably, lead to increasing the required level of financial resources.

Again, the FCA is striving to take a proportionate and risk-based approach to the supervision of firms with regards to financial resources. It is then thought this will allow the regulator to focus on those firms and sectors which have the greatest potential to harm consumers, or harm the integrity of the UK financial system.

The specific areas related to adequate financial resources that the FCA discusses in their consultation are:

• Financial resources
• Systems and controls, governance and culture
• Identifying and assessing the risk of harm
• Risks that can lead to harm or impair the ability to compensate for harm done
• Viability and sustainability of the business model and strategy
• Wind-down planning

Adequate Financial Resources: What the FCA is looking for

In order to assist firms, the FCA have summarised what they look for from all firms in relation to adequate financial resources. This includes proportionate & regular assessments of risk, understanding the business model and strategy of the firm, preventing harm from occurring, putting things right when they go wrong and minimising harms from failure.

> Proportionate and regular assessment of risks:

The FCA is looking for firms to have a forward-looking approach to risks and how these evolve throughout the economic cycle. This approach should be proportionate to the “likelihood of risks to which the firm is exposed occurring and the amount of risk it poses.”

In some instances, this might be limited to a firm being able to simply demonstrate the ability to pay debts as they fall due. 

Additionally, the regulator is looking for there to be a balance between ensuring financial soundness whilst avoiding excessive costs and that a firm’s assessment of their risks are undertaken at least annually.

Any assessment of risk should look to be dynamic in a reflection of the fact that the business environment can be ever changing and dynamic.

> Understand the business model and strategy:

Firms should really understand their business model and strategy and comprehend that existing and emerging risks and vulnerabilities (such as changes in operational or economic circumstances) might affect the firm’s ability to generate acceptable returns – as well as have access to adequate capital to support the business and any of their losses.

> Prevent harm from occurring:

The regulator informs that firms should be able to detect, identify, and rectify problems themselves and that having a sound risk management and controls framework is paramount.

> If things go wrong, put them right:

A firm should identify sources of potential harm and estimate the impact they may have, (whilst also considering that not all events or scenarios might occur at the same time - and that some of these might be covered by Professional Indemnity Insurance).

Additionally, a firm should consider the potential depletion of financial resources, and the inability to monetise assets at short notice or in a timely fashion.

> Minimise harm in failure:

In order to minimise harm if a firm fails, the regulator would look for firms to consider the scenarios leading them to experience financial stress, any potential recovery options and how their resources (both financial and non-financial) are maintained should it be necessary to wind-down and have the firm exits the market.

Next Steps:

All solo-regulated firms that this consultation paper impacts should familiarise themselves with the content of CP19/20 and, those firms wishing to have their say on the consultation should ensure that they send their responses to the regulator by the 13 September 2019.

In particular, firms should ask themselves:

• If they agree with the proposed Consultation Paper text and the clarifications the FCA is aiming to put across with regards to adequate financial resources; and
• Whether they agree with the FCA’s expectations as to the practices a firm should adopt when assessing adequate financial resources.

After this date, the FCA intends to review all feedback it receives before publishing their rules in a Policy Statement towards the end of the year.

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