How to assess adequate financial resources using the FCA framework

18 November 2020

The Financial Conduct Authority (FCA) has published finalised guidance (FG20/1) about its framework, which is designed to help financial services firms ensure they have adequate financial resources and to take effective steps to reduce harm.

The background

The assessment of adequate financial resources is an important element of the FCA supervisory work, and the framework explains its purpose . It also sets out the FCA’s approach to the assessment of adequate financial resources and expectations of how firms determine they have adequate financial resources.

The FCA’s aim is to improve the way firms operate so that they can take effective steps to prevent harm from occurring, by improving controls and/or reducing the risk in their activities and putting things right when they go wrong.

Having adequate financial resources:

  • allows firms to operate and provide services through the economic cycle
  • allows for an orderly wind-down without causing undue economic harm to consumers or to the integrity of the UK financial system.

What is the FCA looking for?

Proportionate and regular assessment of risks:

  • A forward-looking approach to risks and how these evolve throughout the economic cycle that is proportionate to the likelihood of risks to which the firm is exposed occurring and the amount of risk it poses. For some firms, this might be limited to demonstrating the ability to pay debts as they fall due. 
  • Balance between ensuring financial soundness while avoiding excessive costs.
  • To be at least annual, reflecting the fact that the business environment is dynamic.

Understanding the business model and strategy:

  • Existing and emerging risks and vulnerabilities might affect a firm’s ability to generate acceptable returns and have access to adequate capital to support the business, including any losses.

Prevent harm from occurring:

  • Firms should be able to detect, identify and rectify problems themselves. A sound risk management and controls framework is important.

Put things right when they go wrong:

  • Identify sources of potential harm and estimate their impact, taking into consideration that not all events might occur at the same time and some might be covered by Professional Indemnity Insurance (PI) (it is not a worst-case scenario).
  • Consider the potential depletion of financial resources, and the inability to monetise assets in a timely manner.

Minimise harm in failure:

  • Consider the scenarios that may leada firm to experience financial stress and how resources are maintained whilst the business exits the market.

This guidance does not place specific additional requirements on firms because of Covid-19, but the crisis underlines the need for all businesses to have adequate resources in place and to assess how those needs may change in the future. It applies to all FCA solo-regulated firms subject to threshold conditions and/or the Principles for Business (PRIN).

Click here for the link to the full guidance

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