On 13 June 2019, the FCA published Consultation Paper 19/20: Our Framework: Assessing Adequate Financial Resources (CP19/20).
Understanding a firm’s financial risks, its proximity to failure and how harm is minimised in failure is an important component of the FCA’s supervisory work. Firms should undertake their own assessment of the adequacy of financial resources and have credible wind-down plans in place, because the FCA accepts that some firms will fail as a sign of markets functioning well.
To minimise harm the FCA can set and enforce a minimum level of capital and/or liquid resources that a firm is required to hold. The FCA also requires firms that hold client assets to protect them in the event of firm failure.
The FCA expects a firm’s assessment of adequate financial resources to be proportionate to the nature, scale and complexity of its activities. All firms should assess the risks inherent in their business model, the potential harm that can be caused and explain how to close the business in an orderly way. The FCA does not expect this always to be a detailed assessment, for instance where a firm has assessed that its business model results in a low potential for harm.
The assessment should:
- consider a forward-looking approach to risks and how these evolve throughout the economic cycle;
- reflect the risks to which the firm is exposed and the amount of risk it poses;
- be proportionate to the likelihood of the risks occurring;
- ensure they are financially sound while avoiding excessive costs, which could hinder firms from carrying out their business in a viable way; and
- happen at least annually, reflecting the fact that the business environment is dynamic so the assessments of risk and harm should be dynamic too.
In CP19/20 the FCA explains the purpose of, and its approach to the assessment of adequate financial resources, for all FCA solo-regulated firms subject to the threshold conditions and/or the Principles for Businesses, and provides further guidance on the meaning of ‘adequate financial resources’ under these.
In CP19/20 the FCA sets out:
- the role of assessing adequate financial resources;
- what it looks for from firms when assessing adequate financial resources; and
- its expectations as to the practices firms should adopt in their assessment of adequate financial resources.
The FCA is specifically seeking responses to questions regarding whether stakeholders agree with its proposed text clarifying adequate financial resources and the FCA’s approach thereto.
The deadline for responses to CP19/20 is 13 September 2019.